UBS’s admission that it lost nearly $356-million on the botched Facebook IPO puts pressure on Nasdaq OMX Group Inc. and raises questions about how quickly the exchange can put this problem behind it.
In its quarterly earnings, the Swiss bank said it plans to take legal action over the massive problems during Facebook Inc’s $16-billion market debut, which caused it to lose far more than other market makers and trading firms. UBS AG said it would seek to recover the losses in full.
That throws into question whether Nasdaq’s recently filed all-cash $62-million repayment proposal for market making firms harmed by the IPO will appease other customers, too. Market makers, including UBS, which facilitate trades for brokers and ensure liquidity, lost upward of $500-million.
Like UBS, Citigroup Inc.’s Automated Trading Desk is unlikely to accept Nasdaq’s compensation plan, which would require firms to waive their right to sue Nasdaq over the IPO, while Citadel and Knight Capital Group Inc. are likely to sign on, a source familiar with the situation said.
Representatives from three of Nasdaq’s largest retail market makers -- Citi, Citadel and Knight -- had no comment. A representative from UBS said the firm has not filed any action against UBS so far and that it would not do so “frivolously.”
Many have questioned how UBS could have lost nearly 10 times what other market makers say they lost. UBS provided some detail in its earnings report, but left many questions unanswered.
UBS handles most of the order flow from Charles Schwab Corp., one of the biggest U.S. brokerages, with about $1.8-trillion in client assets. It also takes orders from other retail brokerages, including TD Ameritrade and Fidelity.
But that alone may not account for the massive loss. UBS also said that, as a result of “multiple operational failures by NASDAQ, UBS’s pre-market orders were not confirmed for several hours” rather than in the usual milliseconds. That triggered its internal systems to re-enter orders multiple times, it said.
When the confirmations finally came through, UBS and other market makers were left owning large amounts of unwanted Facebook stock, which led to losses as the stock plunged.
“As a result of system protocols that we had designed to ensure our clients’ orders were filled consistent with regulatory guidelines and our own standards, orders were entered multiple times before the necessary confirmations from Nasdaq were received and our systems were able to process them,” UBS said. “Nasdaq ultimately filled all of these orders, exposing UBS to far more shares than our clients had ordered.”
It also is unclear what role UBS’s own trading system might have played in the losses or what legal action the company will take.
“UBS is going to say, ‘you did not perform the service a professional is supposed to perform’ and that’s malpractice,” said John Coffee, a securities law professor at Columbia Law School in New York. He added that Nasdaq’s potential liability may be linked to whether the trading issues can be tied to regulatory decisions or professional service problems.
Nasdaq declined to comment.