July 23, 2012 / 12:53 AM / 6 years ago

Nasdaq compensation plan may not be enough

NEW YORK (Reuters) - Nasdaq OMX Group’s (NDAQ.O) plan to pay a total of $62 million to firms that lost money due to Facebook Inc’s (FB.O) botched market debut may fall short of appeasing Wall Street market makers, which would have to sign off on their right to take legal action against the exchange in order to collect.

Monitors show the value of the Facebook, Inc. stock before the closing bell at the NASDAQ Marketsite in New York, May 18, 2012. In late trading, Facebook shares were only a few cents above the company's initial public offering price of $38, after opening 11 percent higher, rapidly heading south to touch their initial price and then rebounding by several dollars. REUTERS/Keith Bedford

“I have a hard time believing that they will just settle for that,” said consultant Chris Nagy, who thinks “that it’s not going to be enough at this point in time.”

Market makers, which facilitate trades for brokers and ensure liquidity, lost upward of $200 million in the $16 billion IPO on May 18, as technical glitches on Nasdaq’s systems delayed the offering, and then left many investors in the dark for more than two hours as to whether their orders had gone through.

The all-cash reimbursement plan, which Nasdaq filed with regulators late Friday, is $22 million more than originally proposed in June.

Nasdaq is due to report its earnings on Wednesday and executives will likely be asked to explain why the company decided to boost the amount, and how it intends to pay for it.

Liabilities at U.S. exchanges are capped in most instances. Nasdaq’s cap is $3 million and the plan filed with the SEC is meant to increase that in this specific instance. But a legal source told Reuters a firm could sue in the case of gross negligence.

The fact that Nasdaq boosted the amount it plans to pay out may indicate that the exchange is not confident in its legal position, Nagy said.

Nasdaq originally proposed a $40 million plan comprised mostly of trading rebates.

That plan was blasted by market makers for being too little and it drew accusations of anticompetitiveness from other exchanges, which said the rebates would force clients to trade on Nasdaq’s exchange in order to be paid back.


The modification of the plan was seen as just another step in the negotiations over an issue both sides would like to see cleared up quickly, according to James Angel, a professor at Georgetown University.

“As long as it is outstanding, there is a continuing reputational hit to Nasdaq,” he said. “Nasdaq has to consider not only the direct cost of what they could get away with not paying, but also the relational cost of a long legal battle with their biggest customers.”

The market makers obviously want their money sooner rather than later, and neither side wants to end up paying millions in legal fees, he added.

But Nasdaq’s bumping up the amount to be paid back by $20 million may not be enough.

Knight Capital Group KCG.N — one of the top four retail market makers in the Facebook IPO, along with UBS UBSN.VX, Citigroup’s (C.N) Automated Trading Desk, and Citadel Securities — reported its earnings on Wednesday, detailing its $35.4 million in losses associated with the Facebook IPO problems.

Knight’s shares sank 11 percent on Wednesday, another 2 percent on Thursday, and 1.3 percent on Friday, hitting more than six year lows.

A Knight spokeswoman said it would probably not have anything to say about Nasdaq’s new plan until it has the chance to file a comment letter to the U.S. Securities and Exchange Commission as part of the regulatory process.

UBS and Citadel representatives had no comment, while Citi was not immediately available.

Knight and UBS have separately hinted that they could bring legal action against Nasdaq if the compensation does not cover their losses.

Unconfirmed news reports have said UBS may have lost considerably more that earlier thought, perhaps $350 million.

Nasdaq also faces regulatory investigations into its systems and actions on May 18.

During the chaotic hours after Facebook debuted, market makers say they tried in vain to reach contacts at Nasdaq to find out about their positions in Facebook. They were also calling the SEC to make sure the regulator understood the gravity of the situation.

In its filing, Nasdaq stood by its decision not to halt the most anticipated IPO in years.

There “was an orderly, liquid, and deep market in FB stock, with active trading on all markets. Halting trading on a market-wide basis in these circumstances would have been unprecedented, and, in Nasdaq’s view, unjustified,” it said in the filing.

Reporting by John McCrank

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