Market participants continued to bash Nasdaq OMX Thursday over the exchange operator’s botched handling of the Facebook IPO, even as its chief executive continued to unveil further details of a plan for addressing the debacle.
The plan, "is underwhelming at best," declared Thomas Joyce, chief executive of market maker Knight Capital, during an investor conference hosted Thursday by Sandler O’Neill & Partners.
"This is not the solution. Nasdaq has to go back to the drawing board and come up with something sensible," he added.
Nasdaq had created a "voluntary accommodations fund" of $40 million to compensate trading firms "disadvantaged" by technical problems that beset the initial offering of Facebook shares on May 18.
The funds would be paid out to "qualifying members" of the Nasdaq Stock Market who were affected by the inability of its IPO Cross system to deliver messages for executing trades. Messages to execute orders were supposed to be delivered at 11 a.m. Trading in Facebook shares did not start until 11:30 a.m.
NYSE Euronext immediately had decried the plan, saying the plan is "wholly inconsistent with fair practice and an undue burden on competition.” In effect, the voluntary accommodations plan that Nasdaq submitted to the Securities and Exchange Commission earlier in the day incents trading firms to move orders to the Nasdaq Stock Market in order to receive discounts.
During the Sandler conference, Nasdaq chief executive Robert Greifeld defended the plan, declaring that it was not a grab for more market share. He also said that when the exchange replayed the opening of the trades, prices for the IPO did not change.
Previously, Nasdaq had announced that it will retain IBM to review its systems.
Greifeld has also publicly declared Nasdaq’s penitence on major media outlets.
"We have been embarrassed and certainly we apologize to the industry," he said on CNBC Wednesday.
None of these efforts have eased the public outcry over the Facebook fiasco.
Four major market makers involved told Reuters that they expect their losses to be around $115 million.
These include: UBS AG, $30 million; Knight Capital Group, $30 million to $35 million; Citadel Securities, $30 million and Citigroup, $20 million.
UBS, Citadel and Citigroup all declined to respond to comment requests on the plan, but Knight Capital’s Joyce was vocal on the subject during Thursday’s Sandler event.
Joyce noted industry rumors that actual losses tied to the fiasco could run as high as $200 million.
"I have no doubt that they are true. I would not be surprised if the number was in the higher end of the range," he said.
Moreover, Joyce declared that Nasdaq needs "to go back to the drawing board and prove they are a client-focused organization. Without their clients, they won’t have a whole heck of a lot. Right now, they have some unhappy clients."
"I said in the recent past that Nasdaq created the problem, period. Nasdaq made decisions that created this problem that the industry suffered through. It is up to Nasdaq to create a solution," he said.
In a report on the compensation plan, Raymond James equity analyst Patrick O’Shaughnessy wrote that proposal was "unlikely to resolve customer discontent."
"We believe NASDAQ’s proposed accommodation fund is unlikely to satisfy firms that experienced trading losses from a trading glitch during a recent, high-profile IPO. While this announcement does quantify NASDAQ’s immediate financial exposure, we believe the overhang of unsatisfied customers and potential lawsuits will remain," he wrote.
Moreover, O’Shaughnessy warned that "there is also no guarantee that the SEC will approve the proposal, which NYSE Euronext has already publicly criticized."
"Will the SEC even allow targeted customer rebates? We are not convinced that SEC rules will permit NASDAQ to provide preferential pricing to certain customer," he wrote.
Ultimately, O’Shaughnessy argued that Nasdaq was in a no-win situation.
"If it fully accommodates all claims deemed legitimate by FINRA, the financial hit could easily exceed $100 million and it could set a dangerous precedent for the industry," he wrote. "On the other hand, if NASDAQ sticks to the $40 million accommodation pool, it faces the specter of upset major market participants directing their order flow elsewhere, thus harming market share and, as a result, trading revenues (potentially in its U.S. options business as well as U.S. equities) and market data revenues."
In addition, he stated, NASDAQ may face highly-publicized lawsuits from member firms, although we believe NASDAQ would likely prevail in those lawsuits due to the protections provided by Rule 4626.
This story originally appeared in Traders Magazine’s sister publication Securities Technology Monitor
