Knight Capital Group Inc. (KCG) estimated that it lost about $30 million to $35 million trading Facebook Inc. (FB) because of technical problems at Nasdaq OMX Group Inc. (NDAQ) related to the social-media company’s initial public offering.
The brokerage and market maker said that while it submitted claims to Nasdaq, “there are no assurances that the company will be able to recover any of its losses resulting from the numerous issues and problems at Nasdaq,” according to a filing today with the U.S. Securities and Exchange Commission. Knight, based in Jersey City, New Jersey, said it’s “evaluating all remedies available under law.”
Knight Chief Executive Officer Thomas Joyce told CNBC on May 21 that he “wouldn’t be shocked” if total brokerage losses from the IPO reached $100 million. Nasdaq OMX’s computer systems used to establish the opening price for Facebook were overwhelmed May 18 by order cancellations and updates during the “biggest IPO cross in the history of mankind,” Nasdaq OMX Chief Executive Officer Robert Greifeld said May 20 in a conference call with reporters.
After the exchange repaired the problem, order updates for 30 million shares didn’t participate in the auction because of an error, Nasdaq said in a notice the next day. Reports of who received executions in the cross were delayed until 1:50 p.m. New York time on May 18, the company said.
“This wasn’t in any way, shape or form an industry failure,” Joyce told CNBC. He said Nasdaq should have delayed trading, possibly to May 21. “It wasn’t a systemic issue. The failure was Nasdaq’s.”
Robert Madden, a Nasdaq OMX spokesman, declined to comment.
Facebook has declined 16 percent to $32 from the $38 price set by underwriters on May 17, when 421.2 million shares were sold. The SEC said it will review May 18’s trading after Nasdaq was plagued by delays and crossed quotes, or a situation where sellers appear to be asking less than buyers are willing to pay.
Knight is one of the largest wholesalers, a category of market makers that executes orders for individual investors sent to the firm from retail brokers. These firms may guarantee customers executions in the auctions at the start and end of trading each day at the resulting price, assuming they can manage their financial risks by buying and selling in the market. Other large wholesalers include UBS AG, Citigroup Inc., Citadel LLC and E*Trade Financial Corp.
22% of Trading
Facebook accounted for 22 percent of equities volume on May 18 at online brokerage TD Ameritrade Holding Corp. (AMTD), according to Steve Quirk, a senior vice president at the Omaha, Nebraska-based company. Knight traded a daily average of $22 billion in its U.S. equities market-making unit in the first quarter, Joyce said April 18 on a conference call.
Nasdaq asked the Financial Industry Regulatory Authority to oversee claims submitted by brokers for financial losses related to the Facebook IPO auction process. Finra will assess the requests and let the exchange know which complaints are valid.
The size of the pool Nasdaq would use to reimburse customers must be approved by the company’s board, the exchange said on May 21. The pool has a maximum payout of $3 million for problems related to trading-system errors. Greifeld said on May 20 that about $10 million the exchange received from its unanticipated participation in the IPO auction would be added to the fund, if the SEC allows it.
Knight shares fell 1.3 percent to $12.28 as of 7:43 p.m. New York time today following its filing. Nasdaq OMX has retreated 5.2 percent since May 17, the day before the Facebook IPO.
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