* Says SEC should hold off on discussion of exchanges'
* Urges SEC to drop idea of firms waiving right to sue
By John McCrank
Aug 30 After heaping criticism on Nasdaq OMX
Group's initial offer for compensating brokers for its
botching of Facebook's initial public offering, trading
firm Knight Capital Group Inc said it accepts the
exchange's latest plan, which would pay out $62 million.
The plan, which Nasdaq has called its "definitive word" on
the Facebook debacle, is under consideration by the SEC and
brings into question the extent to which an exchange can be
liable for technical slip-ups. U.S. exchanges match hundreds of
billions of dollars of securities transactions every day.
Knight's support comes after Nasdaq increased the payback
fund to $62 million in cash from an earlier $40 million, made up
mostly of trading rebates, the market-making firm said in a
letter to the U.S. Securities and Exchange Commission, dated
Nasdaq has around 300 member firms that trade on the
exchange. Knight and other retail market-making firms and
brokers together lost more than $500 million in the IPO.
Of the handful of comment letters on the compensation plan,
two have voiced support: Knight's and hedge fund Citadel's.
Seven -- from market makers, brokers, and lawyers for individual
investors -- have called for it to be rejected.
"Although we would have preferred that the accommodation
pool cover all losses sustained by Nasdaq members, we do support
Nasdaq's proposal," Knight said in the letter.
Knight, which facilitates trades for other firms, had called
Nasdaq's earlier plan "inadequate," and said it was considering
legal action over the Facebook IPO.
Liabilities at exchanges, which have some regulatory duties,
are capped in most instances. Nasdaq's cap is $3 million.
Much of the debate around the plan has focused on whether
Nasdaq should be able to cloak itself in regulatory immunity in
situations where it is operating as a for-profit entity.
Facebook's eagerly anticipated IPO on May 18, which raised
$16 billion, was initially delayed by 30 minutes due to a
technical glitch at Nasdaq.
The exchange then made the decision to get the stock trading
by using a secondary system that ended up leading to delays in
many clients orders and confirmations, costing some investors
and traders big losses as the stock price dropped after an
UBS AG, which disclosed it lost more than $350
million, and Citigroup's Automated Trading Desk, which is
said to have lost up to $35 million, have argued that Nasdaq
should be responsible for all of the losses, because the
decision to move forward with the IPO was a business decision
made in haste.
Further, Citi said trading of Facebook should not have been
allowed to continue during the confusion that followed.
But Knight, which said it lost more than $35 million in the
IPO, urged the SEC to leave the discussion of liability
limitations and regulatory immunity to another day. Citadel,
which is said to have lost $20 million, made a similar request.
Knight did urge the SEC to reject a portion of Nasdaq's plan
requiring firms that sign on to waive their right to sue the
exchange, likely before they know how much they will be
reimbursed. Knight said that would set "a harmful precedent."
"Setting forth those types of requirements in the context of
a rule filing inappropriately mixes commercial issues with
regulatory requirements," Knight said in the three-page letter
also addressed to SEC Chairman Mary Schapiro.
It said if the SEC disagrees and determines that some form
of release is appropriate, it should only be sought after Nasdaq
members are notified of the amount Nasdaq is willing to pay
under the terms of the accommodation plan.
A Nasdaq spokesman had no comment on Knight's letter.
Nasdaq also faces regulatory investigations into its systems
and actions during the IPO.
Knight had its own trading glitch on Aug. 1, costing the
firm $440 million and nearly forcing it into bankruptcy before a
group of independent firms saved it with a $400 million