Nasdaq OMX’s Facebook restitution plans come under fire
Nasdaq OMX has laid out its plans for compensating customers who lost money during the bungled Facebook IPO on 18 May but has faced criticism from rival exchange NYSE Euronext.
Boards of both the Nasdaq OMX Group and its main US bourse the Nasdaq Stock Market have asked regulator the Securities and Exchange Commission to approve a voluntary accommodations fund of US$40 million.
The stock exchange’s members will be compensated if they were directly disadvantaged by the technical glitch that occurred prior to the start of continuous trading at 11.30 or if they had uncertainty regarding their IPO cross position. This includes sells priced at US$42 or less which failed to execute, sells priced at US$42 or less which executed at an inferior price, or buys priced at US$42 which were executed during the cross but not immediately confirmed.
Independent regulator, the Financial Industry Regulatory Authority, has agreed to evaluate claims made by the exchange’s members.
Approximately US$13.7 million would be paid in cash, with the remainder used to reduce the trading fees for affected members over the next six months.
NYSE Euronext has expressed concern over Nasdaq OMX’s plan to reduce trading costs, stating it would “be wholly inconsistent with fair practice and an undue burden on competition”.
By reducing trading fess, NYSE Euronext said the added incentive to send trades to Nasdaq OMX would allow it to reap market share gains it would not have otherwise received.
“This is tantamount to forcing the industry to subsidise Nasdaq’s missteps and would establish a harmful precedent that could have far reaching implications for the markets, investors and the public interest,” read a statement from NYSE Euronext. “We intend to strongly press our views that Nasdaq’s proposal cannot be allowed to permit an unjust and anti-competitive situation.”
The technical error which hit the Facebook IPO stemmed from the inability of Nasdaq OMX to calculate an opening price. The five millisecond continuous order placement period used by Nasdaq OMX to set the opening price was reportedly disrupted by order cancellations, which meant the bourse had to manually override the process, leading to a 25 minute delay to the start of continuous trading. Nasdaq OMX has also partnered with IBM to conduct a review of the current state of processes for designing, and maintaining market systems.