Breakingviews-Nasdaq pours gasoline on Facebook fire

Thu Jun 7, 2012 9:54pm IST

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(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

By Antony Currie

NEW YORK, June 7 (Reuters Breakingviews) - Nasdaq (NDAQ.O) boss Bob Greifeld needed to find a salve for brokers singed by his exchange’s botch-job on Facebook’s (FB.O) market debut. The technological meltdown on the day of the initial public offering last month may have cost clients as much as $200 million. Instead, Greifeld fanned the flames.

He offered up a measly $40 million in compensation. That’s barely a third of what Citadel, Knight Capital (KCG.N), UBS (UBSN.VX) and Citigroup (C.N) appear to have collectively lost because Nasdaq couldn’t confirm orders as Facebook began trading. Knight chief Tom Joyce reckons other losses could add another $80 million to the tab. It’s little wonder these firms are taking the rare step of lambasting the exchange in public.

Moreover, the way Nasdaq intends to fund the payout is controversial. Actual cash compensation is just $13.7 million. Most of that comes from Nasdaq’s gain on Facebook stock on the day, which went into an error account and usually has to be returned to brokers anyway. The other $3 million is the maximum compensation the exchange’s bylaws allow it to pay in any given month for a technological failure. That’s far from adequate for a bourse handling $16 billion IPOs.

Worse, perhaps, is Nasdaq’s offer of cut-price trading fees to cover the other $26 million of restitution. The New York Stock Exchange NYX.N argues the rebate is anti-competitive, enticing customers to send orders to Nasdaq that it might otherwise have routed elsewhere. Bill O’ Brien, CEO of smaller rival Direct Edge, took an even tougher line, calling Greifeld’s plan potentially illegal and “a shameless attempt to basically turn an investor confidence-eroding event into a competitive advantage.”

Nasdaq can maybe prove it is providing fair compensation for faulty trades for which it is directly responsible, as Greifeld implied in an interview with CNBC. But so far he has only created the impression that his company is trying to wheedle its way out of the crisis on the cheap.

With a couple of high-profile merger failures already under his belt, Greifeld can hardly afford greater damage to his reputation or Nasdaq’s. Managing to galvanize customers and competitors against his Facebook problem - and proposed solution - leaves him more exposed.

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CONTEXT NEWS

- Bill O’Brien, chief executive of exchange operator Direct Edge, said on June 7 that Nasdaq’s plan to offer $40 million to compensate firms for losses incurred on the first day of trading of Facebook stock could be illegal. He made the comment at a Sandler O’Neill conference on exchanges and brokerages.

- Nasdaq OMX said on June 6 it would pay out $40 million to brokers after a software malfunction caused its network for crossing share trades to falter when Facebook’s shares first opened on May 18 and left trades unconfirmed until the afternoon of that day.

- Of that amount, $13.7 million would be in cash, made up of the maximum $3 million compensation allowed under its bylaws for losses from technology problems and of the $10.7 million profit that accrued to Nasdaq’s error account on the day of the IPO. The rest will come from reduced trading costs for member firms. The Financial Industry Regulatory Authority has agreed to evaluate claims.

- Losses from the IPO trades are already running at around $120 million at four large stock brokers. Knight Capital estimates its losses at $30 million to $35 million, Citadel may have lost around the same amount, UBS took a $30 million hit and Citi $20 million.

- The New York Stock Exchange criticized Nasdaq’s plan, saying it was anti-competitive as the reduced trading fees may induce brokers to direct order flow to Nasdaq that they might otherwise have sent to other trading venues.

- Knight Capital said the plan “does not come close to covering reported losses.”

- Nasdaq OMX announcement: link.reuters.com/wym68s

- NYSE statement: link.reuters.com/vym68s

- Reuters:

Direct Edge to context Nasdaq plan to aid Facebook clients [ID:nL1E8H761S]

Nasdaq’s $40 mln offer for Facebook losses draws criticism [ID:nL3E8H6DS5]

- For previous columns by the author, Reuters customers can click on [CURRIE/]

(Editing by Jeffrey Goldfarb and Martin Langfield)

((antony.currie@thomsonreuters.com)) Keywords: BREAKINGVIEWS NASDAQ/

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