Nasdaq OMX has delayed its plan to compensate members that lost money during a technical glitch that affected the IPO of Facebook.
The US bourse operator said it would postpone its US$40 million reimbursement proposal until further notice, pending further review by regulator, the Securities and Exchange Commission. Affected members were required to submit their claims by 20 June.
Some aspects of Nasdaq OMX’s plan have come under fire from rival US exchanges.
Nasdaq OMX’s Member Accommodation Plan would compensate members directly disadvantaged by the error which occurred prior to the start of continuous trading in Facebook shares at 11.30 on 18 May, its first day of trading, or if they had uncertainty regarding their IPO cross position. This includes sell trades placed at US$42 or less which failed to execute, sells priced at US$42 or less which executed at an inferior price, or buys priced at US$42 which were executed during the cross but not immediately confirmed.
Of the US$40 million in planned reimbursement, around US$13.7 million would be paid in cash, with the remainder distributed as a reduction in trading fees for affected members over the next six months. Member claims for compensation are to be reviewed by independent regulator, the Financial Industry Regulatory Authority.
But the proposal to discount trading fees has come in for criticism by other US exchanges, including NYSE Euronext, which stated that the plan was “tantamount to forcing the industry to subsidise Nasdaq’s missteps and would establish a harmful precedent that could have far reaching implications for the markets, investors and the public interest”.
The glitch on 18 May meant Nasdaq OMX was unable to calculate an opening price for Facebook’s stock, leading to a 25-minute delay to the start of continuous trading. Because of the error, some traders were unable to determine their Facebook positions or the price they executed at.
Lasting impact
Meanwhile, research from consultancy TABB Group titled ‘IPO survey industry barometer’, has claimed that the impact of the Facebook IPO is almost as significant as the 6 May 2010 flash crash. During the flash crash, a single algorithmic trade sent US markets spiralling in the space of 20 minutes, before rebounding just as quickly.
46% of those questioned said the Facebook incident would affect the IPO market for the next six months, while half of respondents said technical errors related to new issues are of greater concern than market structure issues or the compensation process. Furthermore, 63% said the syndicate process, i.e. the means by which underwriting brokers that build up interest in IPO investment, was an area that was ripe for change.