The Securities and Exchange Commission has approved Nasdaq OMX Group’s plan to spend $62 million to compensate investors and market makers harmed by its failure to properly execute the initial crossing of orders for the first shares being offered to the public by social networking darling Facebook.
The federal regulator said its “approval of the accommodation proposal” made last year by the Nasdaq Stock Market “is consistent with” securities law and existing requirements for efficient operations of markets. The commission also said it “is not reaching any conclusion on the overall adequacy of the amount of the compensation pool” or other financial aspects of the plan.
The Financial Industry Regulatory Authority, which regulates brokers, has been assigned the task of taking in and processing claims of damages.
“We are pleased the SEC has approved our accommodation plan, which will enable our customers, members and market participants to receive appropriate restitution as FINRA promptly begins processing claims,” said Nasdaq spokesman Robert Madden.
Nasdaq members have one week have one week to provide the information needed by FINRA to evaluate their requests, according to an alert sent to Nasdaq equity traders Monday.
Nasdaq originally proposed to pay investors and market makers $22 million in a controversial plan that involved discounts for parties on future trading on its market. The new larger accommodation plan for the May 2013 technical snafus is all cash.
But it still may not satisfy all parties. Last July, Swiss financial services giant UBS said it would seek full compensation for its losses, which it pegged at $357 million.
Market maker Knight Capital Group said it took a $35.4 million pre-tax charge against earnings in its second quarter, due to the delayed and confused opening of trading of Facebook shares.
“We are evaluating all legal rights and remedies in connection with the Facebook IPO,’’ chairman and chief executive Thomas M. Joyce also said, at the time.
Any fine to be imposed on Nasdaq by the SEC and any lawsuits filed in courts involving the Facebook IPO will be dealt with separately by the stock market operator, Madden said.
In the accommodation plan, members would get paid for customers’ losses first, before getting paid for their “proprietary” losses. From the plan approved by the SEC:
“Moreover, payments made pursuant to proposed Nasdaq Rule 4626(b)(3) would be made in two tranches-a member would first receive an amount equal to the lesser of the member’s share or the amount of customer compensation, and then receive an amount with respect to covered proprietary losses. The Commission believes that, because the accommodation proposal would accommodate members for customer losses before accommodating members for proprietary losses, the accommodation proposal should encourage members to compensate their customers for customer losses related to the Facebook IPO.”
According to an earlier Nasdaq filing with the SEC, glitches in Nasdaq’s IPO Cross system failed to work properly on May 18, when it tried to process orders for the first shares in Facebook, the social networking giant, being offered to public investors.
Glitches delayed the dissemination of IPO 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.
Nasdaq fixed the initial problems, the stock opened at $42 and continuous trading began.
But not all eligible orders had participated in the cross and confirmations on orders did not go out until 1:50 p.m.
The Nasdaq plan accommodates four kinds of orders that were placed during the IPO Cross:
1. Sells priced at $42 or less that did not execute
2. Sells priced at $42 or less that executed at an inferior price
3. Buys priced at $42 that were executed in the cross but not immediately confirmed
4. Buys priced above $42 that were executed in the cross but not immediately confirmed and were attempted to be cancelled.
