Nasdaq OMX Group Inc. (NDAQ:US), responding to criticism that it is offering too little to Wall Street firms hurt in Facebook Inc.’s public debut, said the compensation plan covers “objective, discernible” losses suffered by brokers.
The operator of the second-largest U.S. equity exchange has no plans to enlarge the pool, it said in a letter to the Securities and Exchange Commission posted on the agency’s website. Citigroup (C:US) Inc. said last month that it lost millions of dollars because of Nasdaq’s mishandling of the initial public offering and deserves greater reimbursement.
Nasdaq OMX, balancing its role as an organization with legal immunity against claims related to computer breakdowns with its obligation to members disadvantaged when it bungled Facebook (FB:US)’s May 18 IPO, proposed paying $62 million. The payout would be facilitated by a modification to rules governing exchange liability overseen by the SEC.
“Nasdaq believes that the accommodation proposal establishes a fair, transparent and equitable method of identifying categories of members for whom Nasdaq’s system issues caused objective, discernible loss,” it wrote. “The purpose of the proposal is not to pay all claims of losses alleged with respect to the trading of Facebook stock, nor even all the claims of losses alleged to have been incurred on May 18.”
Delays and malfunctions on Nasdaq were the first signs of trouble in the Facebook IPO, which prompted lawsuits against the company, its exchange and the underwriters. At yesterday’s close (FB:US) of $21.87, Facebook was down 42 percent from the $38 price set by underwriters on May 17.
Citigroup, the third-biggest U.S. bank, said losses in its equity market-making unit exceeded its portion of the pool proposed by Nasdaq OMX in July, made after a design flaw in its computers delayed Facebook’s open and left traders confused about how many shares they owned.
Scott Helfman, a spokesman for Citigroup, declined to comment beyond the letter submitted last month.
Citigroup, Chicago-based Citadel LLC, UBS AG in Zurich and Knight (KCG:US) Capital Group Inc. in Jersey City, New Jersey, operate equity wholesaling groups, brokers that execute orders for individual investors sent by securities firms such as Charles Schwab Corp. and TD Ameritrade Holding Corp.
Citadel and Knight said previously they support Nasdaq’s repayment proposal, while UBS, which lost $350 million trading Facebook, asked the SEC to work with Nasdaq to reformulate the proposal to increase the amount paid and cover a broader range of trading losses.
Nasdaq previously told the SEC it would determine how much to pay by comparing firms’ executions for Facebook to the average price, weighted by the number of shares traded, from 1:50 p.m. to 2:35 p.m. on May 18. That price was about $40.53, Nasdaq said. The average price Citigroup suggested was $34.36, based on data compiled by Bloomberg.
Citigroup disputed the formula Nasdaq said it would use to determine how much to reimburse firms, saying the benchmark price selected for determining the level of losses should reflect trading before noon on May 21 -- the next trading day after the IPO was held.
In its letter today, Nasdaq said its calculation is the appropriate one.
“Nasdaq proposes to use a 45-minute window because 45 minutes should have been ample time for a reasonably diligent member to identify any unexpected losses or unanticipated positions and take steps to mitigate or liquidate them,” it wrote. “This is a reasonable and objective approach given that trading firms typically process and determine actions on trading messages within seconds or fractions of seconds.”
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