Take your time.
That’s the advice from the law firm of Entwistle & Cappucci for the Securities and Exchange Commission as the regulator decides whether or not to approve Nasdaq OMS Group’s plan to reimburse trading firms hurt by the Facebook debacle.
The attorneys are representing First New York Securities and two other proprietary trading shops in a lawsuit against Nasdaq. The suit alleges Nasdaq violated the SEC’s Rule 10b-5 by making false and misleading statements as well as “omissions of fact” regarding the quality of its technology.
Because Nasdaq, IBM and the SEC itself are conducting investigations into Nasdaq’s technology and operations, Entwistle & Cappucci argued in a recent letter to the SEC that the agency should wait until these studies are completed before ruling on Nasdaq’s petition.
So what actually happened during the initial public offering of Facebook on May 18? Two things, according to a regulatory filing. Glitches prevented Nasdaq’s IPO cross system from working properly. Glitches delayed the dissemination of Cross transaction reports for over two hours.
Due to problems with the Cross itself, the opening trade was delayed from 11:05 a.m. to 11:30 a.m. At 11:05 a.m., Nasdaq reported an indicative opening price of $42 for Facebook, based on volume of about 72 million shares. At that time, Nasdaq attempted to execute the Cross and print the opening trade. After the initial calculation, but before the trade was printed, Nasdaq’s system accepted several new orders as well as cancellation and replace orders. That led to a recalculation of the price. Still more order changes entered the system.
Because the system kept accepting new modifications, it was unable to print the trade. Nasdaq eventually fixed the glitch and, at 11:30 a.m., completed the auction and printed the trade. The stock opened at $42-based on volume of approximately 76 million shares-and continuous trading began.
At this point, Nasdaq assumed that all eligible orders had participated in the Cross and that trade confirmations would be sent out immediately. This was not the case. In fact, only orders received prior to 11:11 a.m. participated in the Cross. For those orders that did participate, confirmations did not go out until 1:50 p.m.
Nasdaq chief executive Bob Greifeld told analysts on July 25, that he was expecting IBM’s report the following week. It is unclear whether or not the SEC has completed its investigation.
The First New York lawsuit is one of nine filed so far. UBS, which lost $356 million because of the botched IPO, has also threatened to sue.
Nasdaq, in its recent 10-Q filing stated it expects “to incur significant additional expenses in defending the lawsuits, in connection with the SEC investigation and in implementing technical changes and remedial measures.”
