Nasdaq’s $40M Facebook Proposal: Not Much to ‘Like’
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The Fiscal Times
June 7, 2012

Robert Greifeld, CEO of Nasdaq OMX Group (NDAQ), told The Wall Street Journal yesterday that the Nasdaq Stock Market clearly owes an apology to the infuriated traders and investors who lost money amidst the Facebook (FB) IPO fiasco. But does it owe them $40 million in compensation for the losses they incurred during the first chaotic hours of trading in Facebook shares?

That’s the proposal that the exchange has made in the wake of its embarrassing technological malfunction that damaged the exchange’s reputation and helped turn the much-hyped IPO into a damp squib. It is proposing a “one time voluntary accommodations program” under which it would use about $40 million in cash compensation and trading cost credits to address the thousands of complaints it has received from the likes of giant Wall Street firms and small investors. The proposal, approved by the exchange’s directors, still needs the stamp of approval from the Securities & Exchange Commission. Former SEC chief Harvey Pitt has already called the plan “too limited.”

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But this is a program that isn’t likely to make anyone happy. First of all, the total compensation is less than half the amount that trading firms argue they are owed – closer to $100 million. And there are terms and conditions that make the offer even less alluring. The cash will be paid out to “member firms” – in other words, the trading firms themselves. It’s still up to the latter to keep their clients happy, meaning that someone – either the trading firm or the client – will be out some money that they feel they are owed.

Secondly, there lots of elements that have to be proven in order to win part of the settlement: The money and other compensation will go to those “directly disadvantaged due to technical problems” at Nasdaq in the minutes leading up to the start of trading at 11:30 a.m. on the day Facebook shares began trading. The compensation will go out to firms that placed a sell order at $42 or less that wasn’t executed or was executed at a lower price, or a buy order at $42 that was executed but not immediately confirmed. Those unconfirmed buy orders would have left the new “owners” in the dark as to whether they held a position when the stock price quickly began falling, thus leaving them unable to make a decision about how to respond to that price swing.

What Nasdaq won’t cover, the exchange said, are will "losses that resulted from affirmative decisions by members." Odds are that that will turn into a bone of contention, too, as one person’s “affirmative decision” is someone else’s decision made under pressure amidst a chaotic and uncertain trading environment. Nasdaq clearly hopes that its offer will settle the wrath that continues to swirl around the exchange and begin what will be a long process of restoring its reputation and credibility.

Of course, that is assuming that the SEC approves this – and if the Nasdaq’s arch-rival, the venerable New York Stock Exchange (NYX), has its way, that won’t be happening any time soon. What Nasdaq proposes, the NYSE roared, is “wholly inconsistent with fair practice and an undue burden on competition.” That’s because part of the compensation that Nasdaq is offering is made up of discounts on future trades that will make it cheaper for trading desks to route orders via Nasdaq.

Allowing the latter to use pricing “and other machinations as a guise for failing to compensate those impacted by the Facebook IPO issues” would actually amount to a case of Nasdaq taking advantage of its own snafus to win market share, the NYSE implied in its strongly worded statement. The proposal “is tantamount to forcing the industry to subsidize Nasdaq’s missteps.”

Regardless of whether the NYSE succeeds in derailing the compensation offer, the younger of the two rivals is going to have a tough time rebuilding its image and regaining its reputation. Nasdaq officials knew that the Facebook IPO would be a challenge. A year or more before the company even filed to go public, it was very evident that investors would be more obsessively interested in its debut than they have been since Google’s (GOOG) IPO in 2004, and possibly even since Netscape’s game-changing IPO back in 1998.

Hiring IBM (IBM) to review its market systems, as Nasdaq OMX yesterday also announced it plans to do, is too little, too late. How many companies pondering their own IPOs will want to run even the slightest risk that their deals could be bungled as badly? Facebook, which should have been a feather in Nasdaq’s cap, instead has become not just egg on their face, but an entire three-egg omelet. There is no “good” outcome at this stage; only options that are less bad than others.

Business journalist Suzanne McGee spent more than 13 years at The Wall Street Journal before turning to freelance writing. Author of the book Chasing Goldman Sachs, she has written for Barron’s, The Financial Times, and Institutional Investor.