Citi, UBS blast Nasdaq Facebook compensation plan

SEC received nine letters this week, almost all calling the plan inadequate

By now you may have forgotten about the whole Facebook IPO mess, with all the lawsuits and investigations stemming from Nasdaq’s failure to keep up with the number of trades and cancellations coming in for the stock. But you know who hasn't forgotten? Those who lost tons of money because of the glitches. And they aren't happy with the amount Nasdaq is offering them as compensation.

In July, Nasdaq filed a plan that would compensate firms that lost money in the Facebook IPO up to $62 million.

The Securities and Exchange Commission posted nine letters Thursday that it had received between Monday and Wednesday from various parties, including market makers, brokers, a trade group, and lawyers. All but one letter blasted Nasdaq’s compensation plan. 

Among those who wrote letters were representatives for UBS and Citigroup.

Mark Shelton, General Counsel for UBS Americas, called the plan “fundamentally unfair.”

"UBS alone suffered losses in excess of $350 million, the vast majority of which resulted directly from Nasdaq's unprecedented failure to deliver execution reports for tens of thousands oftrades executed in the opening cross for the Facebook IPO," he wrote in a letter address August 22.

Daniel Keegan, Managing Director for Citigroup Global Markets, also blasted the plan.

"Nasdaq cannot cloak its actions in immunity because it was acting exclusively as a for-profit business, and not as a market regulator, when it made the grossly negligent business decisions that caused market participants hundreds of millions of dollars of losses," Keegan said in the letter, also addressed on August 22.

Benjamin Bram, of Watermill Institutional Trading, wrote that he's happy that Nasdaq is taking responsibility, but that he disagrees with the Nasdaq in how it came to the amount it owed to those who lost money.

"This was an unprecedented mess up by an exchange. No one had any idea what was happening and it seems reasonable that people be given more time to figure out what was happening because NASDAQ was not effectively communicating with the community of brokers and investors who had put their trust in them to handle this open and their orders effectively,” said Bram.

The only letter that seemed to be in favor of Nasdaq’s proposal was from John C. Nagel, Managing Director and General Counsel at Citadel Securities.

"While the extent of exchange immunity from liability for mishandling orders is  an important and complex public policy issue, we submit that any Commission consideration of this issue should be addressed  at  a later time and not stand in the way of Nasdaq's proposal to offer voluntary  an unprecedented increase in the amount of compensation available to members,” he wrote.

Some background information

The whole problem stems from problems caused by a large number of order cancellations for Facebook stock on its opening day, which overwhelmed Nasdaq's system. This caused a 30-minute delay in delivering the opening price. The vast number of cancellations also caused Nasdaq to have to delay delivering order messages to investors for hours. Some did not know whether or not their orders went through for six hours.

NASDAQ announced back in June that it would be paying out $40 million to clients who lost money, only $13.7 million of which would be paid in cash to those firms, while the rest of the money would be given to members to reduce trading costs.

Originally NASDAQ had announced that it would be spending $13 million to make up for the glitches, $10 million coming directly from money made by Nasdaq from buying and selling the Facebook shares. The Group Board has added the extra money after consideration, including $7 million in estimated revenues from Facebook stock over the next five years. The amount was then upped to $62 million in July.  

(Image source: https://dealbook.nytimes.com)