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The Globe and Mail

Nasdaq could lose millions over botched Facebook IPO

Commuters pass by the NASDAQ MarketSite in New York's Times Square, May 22, 2012. Nasdaq OMX faces short-term costs from its botched handling of Facebook shares on their first day of trading but the longer term repercussions could be more expensive as it struggles to restore its image


The repercussions from Facebook's botched initial public offering deepened on Thursday as Fidelity Investments found itself dealing with "thousands" of customers with order problems and Knight Capital demanded tens of millions of dollars in compensation from Nasdaq for trading-related losses.

The pressure on Nasdaq in particular was intense, not only from investor lawsuits and angry customers, but from the outside prospect it could lose the Facebook listing entirely after having just obtained it.

A source close to the situation told Reuters that NYSE Euronext had opened discussions with Facebook about a potential stock listing there.

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On Wednesday, the Associated Press spoke to NYSE spokesman Rich Adamonis who said: "There have been no discussions with Facebook regarding switching their listing in light of the events of the last week, nor do we think a discussion along those lines would be appropriate at this time."

A Nasdaq spokesman declined to comment.

Facebook shares added a penny to $32.01 in mid-day trading, but action on its stock has essentially become secondary to the fallout over the IPO – its price, its size, its execution and questions about selective disclosure of its financial prospects.

Advisers familiar with the situation at Fidelity said many investors are now finding out, nearly a week after the fact, that their orders were not executed at the prices they thought.

Fidelity, in a statement, said it was working with regulators and market makers on its clients' issues "and we will continue to do so until we are confident that Nasdaq has done everything it can to mitigate the impact to our customers."

Knight Capital's claims could end up dwarfing the Fidelity issues, though.

The amount of compensation sought by Knight, a leading market maker in U.S. equities, is nearly three times what Nasdaq has set aside as compensation for trading losses.

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"They are certainly facing the specter of some significant lawsuits if this pool is not enough," a source familiar with Knight's situation said.

Other firms said they did not have similar problems, though, raising questions about the scope of the losses.

"The problems were where people were trying to cancel orders; we didn't have that," said Peter Boockvar, equity strategist at Miller Tabak & Co in New York. "Because we didn't have a problem doesn't mean there weren't problems."

Shares of Nasdaq fell 14 cents to $21.67 in afternoon trading. As of mid-day Thursday the stock was down nearly 6 per cent from its last close before the Facebook debacle. Over the same period NYSE Euronext is down just 0.2 per cent.

Investor interest in shorting Facebook's stock is also growing, with nearly eight per cent of the stock out on loan, according to financial data company Data Explorers.

About 70 per cent of the shares available for lending are out on loan as demand to borrow, and possibly short the stock, strengthens, Data Explorers said on Thursday.

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Some 33 million Facebook shares are out on loan, or 7.9 per cent of the free float.

Shorts borrow shares and sell them, betting the price will fall so they can buy back the shares at a lower price and pocket the difference. There are also other reasons to borrow stocks; prime brokers do so for market-making purposes.

The cost to borrow the online social network's shares has fallen sharply, Data Explorers said.

On the firm's scale of 1 to 10, from least expensive to most expensive, Facebook shares scored a 6 after trades settled on Wednesday, down from 10 the day before. One reason for the decline is that more shares are available for borrowing.

Meanwhile, Facebook Chief Operating Officer Sheryl Sandberg spoke to Harvard University students in her first public appearance since the company's disappointing initial public offering, but refrained from addressing the controversy.

Sandberg, who visited her alma mater with her parents and two children, only once made reference to the IPO in her speech. After urging the graduates to use Facebook to stay in touch, she said: "We're public now, so could you please click on an ad or two while you're there."

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