Nasdaq Pays the Piper for Facebook IPO Snafu



Nasdaq OMX Group (NASDAQ:NDAQ), operator of the eponymous stock exchange, will be ponying up just $41.6 million to settle claims with market makers and participants who suffered damages related to the botched Facebook (NASDAQ:FB) initial public offering. This is less than 10 percent of the $500 million that market makers claim to have lost thanks to a technical error that scrambled and delayed trading data on the day of the IPO.

The U.S. Securities and Exchange Commission fined Nasdaq OMX $10 million because of the incident, which was the largest fine ever levied against an exchange operator. In its statement on the issue, the SEC said that Nasdaq was charged with “securities laws violations resulting from its poor systems and decision-making during the initial public offering (IPO) and secondary market trading of Facebook shares.”

The focus of the SEC’s ire was not that Nasdaq OMX suffered a technical failure, but that executives apparently failed to act in a reasonable way. George Canellos, co-director of the SEC’s Division of Enforcement, said the problem was the result of “poorly designed systems” and “hasty decision-making.”

“Too often in today’s markets, systems disruptions are written off as mere technical ‘glitches’ when it’s the design of the systems and the response of exchange officials that cause us the most concern,” said Daniel Hawke, chief of the SEC Enforcement Division’s Market Abuse Unit.

Perhaps most troubling is that Nasdaq broke rules to use what is known as an error account to take a large short position in Facebook, from which it profited to the tune of about $10.8 million.

Nasdaq was hit by another highly public problem in August, when the exchange temporarily went offline. That incident didn’t appear to have a material impact on stock prices, but it did serve as a reminder to regulators and exchange operators of just how fragile the modern markets are given their dependence on intricate software systems.

In light of the events, SEC Chair Mary Jo White has rallied regulatory forces and is pushing policymakers to move forward with five separate reforms related to stock market regulation. The SEC and exchange operators are still in discussions over proposed changes.

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