(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
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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- 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
- 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
Direct Edge to context Nasdaq plan to aid Facebook clients
Nasdaq’s $40 mln offer for Facebook losses draws criticism
- For previous columns by the author, Reuters customers can
click on [CURRIE/]
(Editing by Jeffrey Goldfarb and Martin Langfield)
Keywords: BREAKINGVIEWS NASDAQ/
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