Is Nasdaq BULLYING Facebook Traders?

Nasdaq OMX Group (NASDAQ:NDAQ) has raised its planned compensation amount for brokers who suffered losses due to technical problems on the opening day of trading for Facebook (NASDAQ:FB) stock, but will enforce a new compromise. The stock exchange has decided to shift to an all-cash proposal and has raised the total amount from the initial $40 million to $62 million. However, firms will have to waive their right to sue Nasdaq over the Facebook IPO, according to regulatory documents filed by the company.

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Repayments under the proposal, according to the documents filed by Nasdaq, are conditioned “on the execution of a release of claims against Nasdaq for FB-related losses arising from the [stock’s opening trade], because this condition is aimed at avoiding unnecessary litigation and ensuring equal treatment of all claimants.”

The change is a reaction to the stream of complaints that followed Nasdaq’s first announcement in June, with firms calling the earlier figure too low and rival exchanges protesting its plan of offering part of the compensation as cut-rate fees for doing business on its stock markets. Federal regulators are yet to approve the new proposal.

However, the increased figure is still seen as being far below estimates of the industry’s total losses. Knight Capital Group (NYSE:KCG) said it had incurred a $35.4 million loss related to trading in the shares that day. Hedge-fund firm Citadel is expected to have taken a similarly high loss. Citigroup (NYSE:C) lost about $20 million, while UBS (NYSE:UBS) may have incurred the biggest loss of about $350 million, according to the Wall Street Journal. Knight and UBS had earlier already announced they were reviewing legal options.

In its regulatory documents, Nasdaq also warned that exchanges could be run out of business if forced to regularly carry unlimited legal liability.

“If exchanges could be called upon to bear all costs associated with system malfunctions and the varying reactions of market participants taken in their wake, the potential would exist for a single catastrophic event to bankrupt one or multiple exchanges, with attendant consequences for investor confidence and macroeconomic stability,” Nasdaq officials wrote. “Alternatively, the cost of providing exchange services would have to rise dramatically for all investors to cover this material and new risk.”

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