Nasdaq OMX Group Inc. said it will offer cash and rebates totaling $40-million to compensate clients affected by the problems with Facebook Inc.'s initial public offering, an amount well short of the losses claimed by top market makers for the IPO.
After approval by regulators, Nasdaq said on Wednesday, $13.7-million would be paid to its affected member firms and the balance would be credited to members to reduce trading costs, with all benefits expected to be awarded within six months.
Nasdaq chief executive officer Reobert Greifeld told the Wall Street Journal on Wednesday that he and other Nasdaq officials "owe the industry an apology" for the technical problems that plagued the Facebook IPO.
The idea of rebates has caused some concern at other exchanges. Sources at Nasdaq rivals said that such a plan would force brokers to trade at Nasdaq, taking market share from competing exchanges.
"This is tantamount to forcing the industry to subsidize Nasdaq's missteps and would establish a harmful precedent that could have far reaching implications for the markets, investors and the public interest," NYSE Euronext, Nasdaq's main competitor, said in a statement Wednesday afternoon.
"We intend to strongly press our views that Nasdaq's proposal cannot be allowed to permit an unjust and anti-competitive situation."
The top four market makers in the $16-billion Facebook IPO - UBS, Citigroup, Knight Capital, and Citadel Securities - together lost upward of $115-million due to technical problems that prevented them from knowing for about two hours if their orders had gone through after Facebook began trading.
One of those firms, Knight Capital, said in a statement that it was "disappointed that Nasdaq's compensation fund does not come close to covering reported losses from broker-dealers. Their proposed solution to this problem is simply unacceptable." The statement also said that company is "evaluating all remedies available under law."
Smaller market makers that might have suffered losses would also receive a part of the $40-million Nasdaq proposes. Two senior executives in the financial industry have said they expect Nasdaq member claims to total $150-million to $200-million.
"Our expectation is that every firm will receive some measure of cash and that every firm will receive their full accommodation by year end if current trading patterns persist," Eric Noll, executive vice president for transaction services at Nasdaq OMX, said in a webcast to member firms.
Under the plan, investors who attempted to buy the company's shares at $42 or less, but whose orders were not executed, would be eligible for compensation. In addition, trades that were executed at an inferior price would also be eligible, as well as trades that did go through successfully but were not confirmed because of Nasdaq's technical problems.
A filing with the U.S. Securities and Exchange Commission is expected soon, and an executive from a rival exchange declined to comment until its publication.
Former SEC chiefs speak
"They clearly screwed up. They clearly owe their customers money," said former SEC Chairman Arthur Levitt. He declined to comment on whether the situation warranted an SEC investigation or fine.
Another former SEC chairman, Harvey Pitt, welcomed the Nasdaq OMX initiative, but he called it too limited. "But I think the steps it has taken - while positive - are too limited. The dollar estimates for harm caused by Nasdaq's failures easily exceed - several times over - the $40-million it has set aside," he said on Wednesday in response to an email query.
Nasdaq's Mr. Noll said the exchange is still engaged in a review process with the SEC. It is unclear how long that process will take or how long the SEC will take to decide if Nasdaq's proposal for compensation is adequate.
He said that the factors that went into determining the $40-million figure included the exchange's liability cap of $3-million a month, Nasdaq's proceeds of $10.7-million from the Facebook IPO, and an estimated $7-million in revenue forecast over the next five years from Facebook trading and listing fees.
During the first day of Facebook trading, technical glitches left the market makers - who facilitate trades for brokers and are crucial to the smooth operation of stock trading - in the dark for hours as to which trades had gone through.
Nasdaq's immediate response amounted to a members-only call with one of its executive vice presidents and a statement that the exchange would set aside a pool of $13.7-million to accommodate losses.