NASDAQ OMX Group Inc, the -second-biggest US stock exchange owner, revamped its proposal to compensate brokers that lost money in the public debut of Facebook Inc, boosting the payout to US$62 million cash.
The amendment, which follows criticism from Wall Street market makers and exchanges about the original plan, increases the compensation pool from US$40 million and does away with a proposal to credit most of the money through reduced trading costs, according to a submission with US Securities and Exchange Commission (SEC). Member brokers who accommodated customers will get paid first, it said.
“It is an attempt by NASDAQ to show that they recognize that their clients are very unhappy,” Larry Harris, a professor of finance and business economics at the University of Southern California in Los Angeles and a former chief economist at the SEC, said in a telephone interview. “Clearly making it all-cash is more palatable for regulators and for competitors.”
Delays and malfunctions on the NASDAQ were the first signs of trouble in the May 18 Facebook initial public offering (IPO) that burned investors, spurred losses on Wall Street and prompted lawsuits against the company, its exchange and the underwriters.
“We deeply regret the problems encountered during the initial public offering of Facebook,” NASDAQ OMX chief executive officer Robert Greifeld said in a press release.
In May, Greifeld acknowledged “poor design” in software put the opening auction that set the price for the first traded shares into a loop that delayed its completion.
“This proposal reflects NASDAQ’s effort to identify the categories of investors and members that NASDAQ’s system difficulties caused objective, discernible harm, and the type and scope of such harm and to propose an objectively reasonably and regulatorily balanced plan for accommodating exchange members and their investor customers for such harm,” the exchange wrote in the filing.
NASDAQ said it made this decision despite the “liability protections” for claims of financial loss it possesses as a regulated exchange.
Among securities firms expected to seek recompense is Knight Capital Group Inc. The Jersey City-based broker and market-making firm reported second-quarter earnings this week that fell 79 percent, including a US$35.4 million loss on the Facebook IPO. Without the loss and excluding a pretax investment gain, profit would have risen 5.3 percent, the company said.
“We have been in reasonably consistent dialogue with NASDAQ,” chief executive Thomas Joyce said during a conference call on Wednesday following the earnings report. “We are going to be all eyes and ears waiting to watch and read and hear about what they suggest in their filing.”
Citadel LLC, the Chicago-based investment firm run by Ken Griffin, lost as much as US$35 million in its market-making unit, according to a person with knowledge of the firm.
Facebook was sold by underwriters at US$38 on May 17. The pricing of the first public transaction, a trade known as the IPO cross, took a half hour longer than NASDAQ OMX planned the next morning.