A battle between NYSE Euronext (NYX) and Nasdaq OMX Group Inc. (NDAQ) over a proposed remedy to Facebook Inc. (FB)’s botched initial public offering places the U.S. Securities and Exchange Commission in the middle of a dispute that could delay compensation for brokers.
Nasdaq OMX, the second biggest U.S. exchange operator, is seeking SEC approval of a plan to set aside $40 million for brokers whose orders were mishandled during the glitch, which delayed trades for about 30 minutes during Facebook’s May 18 trading debut. NYSE Euronext, the biggest U.S. exchange owner, says the plan is unfair because a portion of the proposed compensation package is a discount on future trading fees, which may boost Nasdaq’s market share at the expense of competitors.
Executives of exchanges Bats Global Markets Inc. and Direct Edge Holdings LLC, which owns U.S. equity exchanges, raised similar concerns yesterday.
Facebook’s $16 billion IPO is already the subject of an SEC review and shareholder lawsuits. The opposition to Nasdaq’s plan by fellow exchange operators reduces the likelihood that the SEC will quickly approve the compensation measure.
“It definitely complicates things,” said Roberta Karmel, a former SEC commissioner who is now a professor at Brooklyn Law School. “It seems to be making a bad situation worse.”
Nasdaq spokesman Joseph Christinat and Richard Adamonis, an NYSE spokesman, declined to comment on the plan.
Facebook shares have fallen 31 percent since its IPO; Nasdaq OMX has declined 3.9 percent in the same period.
Nasdaq hasn’t yet submitted an official filing with the SEC explaining how the exchange wants to change its rules to allow the compensation, SEC spokesman John Nester said. He declined to comment on the plan.
There is little precedent for how the SEC should handle a technical problem that hurt trading during such a high-profile and closely scrutinized IPO, said James Angel, a professor at Georgetown University’s McDonough School of Business in Washington.
“This is a novel situation,” he said. “This is really the first time where a major technical glitch has led to such major issues.”
That means the SEC will take extra care to scrutinize Nasdaq’s proposal, which will prevent a speedy resolution for investors, Angel said.
“Don’t expect a check in the mail anytime soon,” he said.
Facebook was sold by underwriters at $38 on May 17. The pricing of the next morning’s first public transaction, a trade known as the IPO cross, took 30 minutes longer than Nasdaq planned. About 30 minutes after that, the market owner reported an issue confirming trades.
Order updates and cancellations totaling 30 million shares were submitted into the auction as a technical issue was being repaired between 11:11 a.m. and 11:30 a.m. New York time, Nasdaq CEO Robert Greifeld told reporters on May 20. About half may involve “some level of dispute,” he said.
Nasdaq said in a May 21 notice that the 30 million shares didn’t participate in the IPO cross. An error prevented execution reports for the shares that entered the auction, as well as those that were ignored, from being disseminated immediately to brokerages, the company said.
The program Nasdaq announced June 6 would cover three kinds of orders placed during the IPO cross: sales priced at $42 or less that weren’t executed; purchases priced at $42; and certain types of sell orders that should have participated in the cross and were entered into the market at 1:50 p.m. New York time on the day of the offering, receiving less than $42.
Under the $40 million compensation proposal, Nasdaq said it would pay the qualified brokers $13.7 million in cash with the rest of the money credited through lower trading fees for members who took losses. NYSE said such discounts would encourage customers to trade on Nasdaq to get refunds.
“Such a tactic would potentially strongly incent customers to divert order flow to Nasdaq in order to receive compensation to which they are entitled and allow Nasdaq to reap a benefit from market share gains they would not have otherwise received,” the exchange said in a statement. “This is tantamount to forcing the industry to subsidize Nasdaq’s missteps.”
William O’Brien, the chief executive officer of Direct Edge, said Nasdaq’s plan “violates U.S. securities laws” and hurts competition among the exchanges. “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 in an interview.
“It’s like going to a restaurant,” he added. “Are you going there for the food or because you have a 50 percent off coupon?”
Nasdaq’s Greifeld told CNBC on June 6 that the discounted trades won’t increase his exchange’s market share.
“We are offering this to our customers that transact with us every day,” he said. “They do not have to give us one incremental share for them to earn this payment.”