US regulators approved Nasdaq OMX Group's $62 million compensation plan for firms that lost money in Facebook Inc's glitch-ridden market debut, a victory for the exchange operator that also set the stage for potential lawsuits from firms seeking more.
The Nasdaq plan will give retail market makers far less than the $500 million in estimated losses from Facebook's initial public offering. Nasdaq said in a note to traders on Monday that the US Securities and Exchange Commission approved the plan, and that firms had one week to submit requests for compensation.
A systems failure at Nasdaq prevented timely order confirmations for many market participants in the midst of the leading Internet social network's long-awaited initial public offering in May, 2012. UBS AG has pegged its losses from the social network's IPO at above $350 million. It said it has already filed an arbitration demand against Nasdaq to fully recover losses from the exchange operator's "gross mishandling the IPO."
Other market makers that lost money due to the botched May 18 IPO of Facebook, include units of Citigroup Inc, Knight Capital Group and Citadel LLC. Citi had opposed Nasdaq's plan. Knight supported the plan but did not want to waive its right to sue for compensation. According to Nasdaq's plan, firms that sign on agree not to take legal actions against Nasdaq over the IPO. Citadel has supported Nasdaq's plan. It was not immediately clear if any other firms planned to take legal action to try to recover their full losses. Knight, Citi and Citadel declined to comment on Monday.
At stake is the extent to which US stock exchanges, which match hundreds of billions of dollars of transactions daily, can be held liable for technical glitches in an environment dominated by lightning-fast automated trading. Liabilities at US exchanges, which have some regulatory duties, are capped with the exchanges are performing those duties. Nasdaq's cap for technical glitches in most instances is $3 million a month. The SEC is also investigating the botched IPO and Nasdaq's role in it separately. But a source previously said the two sides are in talks to possibly settle the probe.
Nasdaq has maintained that it is not obligated to compensate firms for losses, and that its plan is voluntary. It has given strict guidance on which types of orders will qualify to be reimbursed. Nasdaq spokesman Joe Christinat said now that the SEC has approved the plan, the Financial Industry Regulatory Authority can promptly begin processing claims for restitution.
UBS called Nasdaq's proposal "inadequate and insufficient," and said in a statement the SEC's approval of the plan does not change its opinion. Citi had also asked the SEC to not approve Nasdaq's plan, arguing in a letter that Nasdaq "was acting exclusively as a for-profit business, and not as a market regulator, when it made the grossly negligent business decisions that caused market participants hundreds of millions of dollars of losses."
Knight, which in August had its own technical glitch that cost it $461 million and nearly bankrupted the company, said in a letter that month to the SEC it supported Nasdaq's efforts but that the condition of having to waive the right to sue would "set a harmful precedent." Shares of Nasdaq, which has completed 50 IPOs since the Facebook IPO, were down 0.4 percent at $32.22 on Monday afternoon.
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