August 22, 2012 / 6:43 PM / in 5 years

Citigroup slams Nasdaq's Facebook compensation plan

NEW YORK (Reuters) - Citigroup slammed Nasdaq OMX Group Inc’s plan to compensate firms harmed by Facebook’s botched market debut to the tune of $62 million, saying in a regulatory filing the exchange should be liable for hundreds of millions more, according to two people who have read the letter.

The falling price of Facebook's stock is seen on a screen reflected in the window of the Nasdaq building in New York August 16, 2012. REUTERS/Lucas Jackson

Citi said Nasdaq’s actions in the May 18 initial public offering amounted to “gross negligence,” according to the people, who asked to remain anonymous because of the sensitivity of the 12-page letter to the U.S. Securities and Exchange Commission, which had not yet been made public.

Citi’s market-making arm, Automated Trading Desk, lost around $20 million in the May 18 IPO, a source told Reuters in May. That is just a sliver of the upwards of $500 million that market-making firms - which facilitate trades, backing them with their own capital - and brokers lost in the $16 billion IPO.

Liabilities at U.S. exchanges, which have some regulatory duties, are capped in most instances. Nasdaq’s cap in most instances is $3 million a month.

But the New York-based exchange should be fully liable for all of the IPO losses, Citi argued, because it was operating in the capacity of a for-profit company during the IPO, and as such it should not have regulatory immunity.

DECISION TO MOVE FORWARD

Facebook’s eagerly anticipated IPO was initially delayed by 30 minutes due to a technical glitch.

Nasdaq then made the decision to put through a fix to the systems problem and get the stock trading by way of a secondary matching engine that led new orders and changes in orders that came in later to not show up in the opening price. A matching engine pairs bids and offers to complete trades.

Eric Noll, Nasdaq’s head of transaction services, later said in a statement earlier that the fix instead led to 2-1/2 hours of uncertainty during which brokers were unable to see the results of their trades.

Citi said in its letter that the decision to move forward with the IPO was a business decision made in haste. Further, it said trading should not have been allowed to continue during the confusion that followed.

Reporting By John McCrank; Editing by Jeffrey Benkoe, Bernard Orr

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