SEC Pounces on Nasdaq Over Facebook IPO

The U.S. Securities and Exchange Commission will investigate Nasdaq (NASDAQ:NDAQ) for the technical troubles that hit Facebook’s (NASDAQ:FB) IPO and will examine whether the exchange did not properly test its trading systems or broke rules when it manually rewrote computer code to jump-start trading.

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Regulators have been investigating trading breakdowns and other problems at the country’s exchanges partly in an attempt to examine whether they may be favoring select investors, the New York Times reported. Nasdaq rival NYSE is also part of two different investigations. The regulatory agency is also trying to increase inspections and taking measures to improve the safety of the markets. No exchange has been accused of wrongdoing yet, but the Facebook case is the most high profile.

On Facebook’s first day of public trading on May 18, the opening was delayed by several minutes, and then technical troubles later in the day meant there was large-scale confusion among investors. During a period of massive uncertainty where investors did not get confirmations on transactions, trades backed up, and Nasdaq’s system reset the stock price over and over again.

Some orders were not executed or were placed at random prices, and several traders had no idea how many shares they held at a time. Trading firms have reported to have lost several millions of dollars because of the faulty executing of orders. In addition, Nasdaq has been accused of being lax in its communication. To solve the back-up problem, Nasdaq eventually overrode the system manually, a move that has also drawn scrutiny because the exchange changed procedure without changing rules.

While the chief executive of the exchange’s holding company Nasdaq OMX Group (NASDAQ:NDAQ), Robert Greifeld, blamed “design flaws” in the system, part of the S.E.C.’s investigation is the concern that Nasdaq lacked an action plan to deal with such a crisis.

“Cases against exchanges are few and far between, and inevitably a big deal,” said Stephen J. Crimmins, a partner at the law firm K&L Gates and a former enforcement official at the S.E.C., told NYT.

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