Bloomberg News

Nasdaq Communication During Facebook IPO Subpar, Niederauer Says

June 08, 2012

NYSE Euronext would have done more to communicate with customers than Nasdaq OMX Group Inc. (NDAQ:US) did during Facebook Inc. (FB:US)’s initial public offering, Chief Executive Officer Duncan Niederauer said.

Niederauer, whose company competed and lost to Nasdaq Stock Market for the right to list the $16 billion offering, said customers of the second-largest U.S. equity exchange operator deserved more clarity. Nasdaq has proposed setting aside $40 million to compensate brokers who lost money because of delays and mishandled orders.

“If a similar fate had befallen us that day when we were trying to take a company public, you would have found us to be much more communicative,” Niederauer said yesterday during a Bloomberg Television interview in New York. “You wouldn’t have had trouble finding us. We would have been telling people what we’re going to do about it.”

Facebook, owner of the biggest social networking website, was scheduled to open at 11 a.m. New York time on May 18 after the offering was priced by underwriters. At about 11:07 a.m., a Nasdaq official told market participants on a conference call that the exchange was delaying the opening. Aside from assurances that an update was coming, the phone line went silent until just before the first trade at 11:30 a.m., according to two people who were on the call and asked not to be identified because the discussions were private.

CEO Discussions

Nasdaq OMX’s computer systems used to establish the opening price for Facebook were overwhelmed on May 18 by order updates and cancellations for the IPO. The solution Nasdaq deployed prevented updates and cancellations for 30 million shares submitted from 11:11 a.m. to 11:30 a.m. from being reflected in the opening trade.

While trading began at 11:30 a.m., Nasdaq didn’t send confirmations until 1:50 p.m. for orders submitted into the opening auction, known as the IPO cross, that were executed and those that were ignored. The lack of reports led to investor and trader confusion about whether they owned shares and prevented them from cutting their losses.

Nasdaq is seeking Securities and Exchange Commission approval of a plan to set aside $40 million for brokers whose Facebook orders were mishandled. NYSE Euronext (NYX:US) says the plan is unfair because about $26.3 million of the proposed compensation is a discount on future trading fees, which may boost Nasdaq’s market share at the expense of competitors.

“People want a little more accountability, they want more clarity, they want more fairness,” Niederauer said yesterday.

Market Share

Robert Greifeld, Nasdaq OMX’s chief executive officer, said at the Sandler O’Neill & Partners LP Global Exchange and Brokerage Conference in New York on June 7 that the $13.7 million it’s paying member firms in cash will be released as soon as the SEC approves its plan. The “vast majority” of brokers will have their claims paid then, he said. The rest will be reimbursed through trading fees, he said.

“People do not have to increase their market share to get the payment compensation,” Greifeld said. “They don’t have to give us one additional share.”

UBS AG (UBSN), Switzerland’s largest bank, is facing losses of as much as $350 million from Facebook trading, CNBC reported yesterday, citing unidentified people. The bank was left holding a larger Facebook stake than the million shares it meant to buy after repeatedly entering an order that wasn’t immediately confirmed, CNBC said.

UBS said its loss on shares of Facebook isn’t material and declined to provide a figure.

Securities Laws

Nasdaq’s plan to compensate brokers through discounted fees violates U.S. securities laws by proposing pricing changes to benefit specific members, William O’Brien, CEO of Direct Edge Holdings LLC, an exchange operator in Jersey City, New Jersey, said in an interview. Exchanges can make pricing changes “but we have a general obligation to do so in a way that still promotes competition among exchanges,” he said.

“There’s a horrible conflict of interest for brokers who have to decide is Nasdaq right because of its general value proposition or am I motivated by getting a discount?” he said.

Nasdaq’s plan is “underwhelming at best,” Thomas Joyce, chief executive of Knight Capital Group Inc., a market maker and institutional broker, said on June 7 at the Sandler O’Neill conference. The company said in an SEC filing last month its losses from Nasdaq’s mishandling of the Facebook IPO ranged between $30 million and $35 million. Nasdaq should “go back to the drawing board” to come up with a better plan, he said.

Thomas Kloet, CEO of TMX Group Inc., owner of the Toronto Stock Exchange, said Nasdaq faced a tough decision about whether to maintain trading in Facebook shares after execution reports weren’t disseminated to customers.

Market Halts

“No one wants to halt the market,” Kloet said in an interview. “We’d analyze the situation and try to predict how long it would be before the fills got out. But if we felt there was an unlevel playing field, we’d look to take that action and halt. It’s a judgment call.”

The Toronto Stock Exchange suffered a daylong trading disruption on Dec. 17, 2008, after a computer failure prevented stock quotes from being disseminated. The exchange decided to stop all buying and selling at about 9:50 a.m., about 20 minutes after trading usually starts in what led to the longest halt since at least April 1997. Market participants bear the risk of an exchange’s systems malfunctioning, Kloet said.

Bats Global Markets Inc., the Lenexa, Kansas-based exchange operator that competes with NYSE Euronext and Nasdaq OMX, halted trading and then called off its own IPO on March 23 when a malfunction in its auction system kept the first transaction from being published properly.

Singapore Exchange

While technology mishaps can afflict any exchange, investors and users should be updated about problems that affect trading, Magnus Bocker, CEO of Singapore Exchange Ltd., said in an interview. He was president of Nasdaq OMX from 2008 to 2009, after Nasdaq Stock Market Inc.’s 2008 takeover of OMX AB, where he had been president and CEO.

“Exchanges have their own rules for how market disruptions are handled for the integrity of markets,” Bocker said. “Exchanges have very advanced trading systems and software, but this will and can happen to everyone. It’s important to keep investors informed and the market well-informed.”

Nasdaq persuaded Kraft Foods Inc. (KFT:US) to move its listing from the New York Stock Exchange, scoring the largest-ever company to switch markets, the foodmaker said yesterday. The $67.8 billion company is the first Dow Jones Industrial Average (INDU) member ever to switch exchanges, according to Nasdaq spokesman Joseph Christinat. It will shift on June 26.

To contact the reporters on this story: Nina Mehta in New York at nmehta24@bloomberg.net; Whitney Kisling in New York at wkisling@bloomberg.net; Inyoung Hwang in New York at ihwang7@bloomberg.net

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net


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Companies Mentioned

  • NDAQ
    (NASDAQ OMX Group Inc/The)
    • $42.77 USD
    • 0.34
    • 0.79%
  • FB
    (Facebook Inc)
    • $74.11 USD
    • -1.75
    • -2.36%
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