On Wednesday, Nasdaq OMX Group Inc. (NASDAQ:NDAQ) announced a $40 million plan to pay brokers who saw their Facebook Inc (NASDAQ:FB) orders mishandled during the company’s IPO on May 18.
With delays and malfunctions on the Nasdaq Stock Market, it was just the beginning on that fateful Friday for the troubled IPO to hurt investors. It has cost Wall Street market makers an estimated $120 million, according to Bloomberg and opened the floodgates for lawsuits against Facebook, Nasdaq and the offering’s underwriters.
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Since its $16 billion offering, the stock has plummeted 29 percent–the largest for a technology company.
Some would say Nasdaq’ payment plan in this very customer-service oriented industry is a good idea but fellow exchange NYSE Euronext doesn’t support the plan.
NYSE Euronext (NYSE:NYX) wrote in an email statement, “This is tantamount to forcing the industry to subsidize Nasdaq’s missteps and would establish a harmful precedent. We intend to strongly press our views that Nasdaq’s proposal cannot be allowed to permit an unjust and anti-competitive situation.”
Does this mean, should this happen to us, we may not respond the same way?
Keep in mind the Securities and Exchange Commission needs to approve Nasdaq’s plan before it can be carried out.
Nasdaq Explains Its Plan
Nasdaq countered the NYSE anti-competitive statement with a CNBC interview on Wednesday. Nasdaq OMX Chief Executive officer Robert Greifeld took to the airwaves to discuss the situation.
He explained the payment plan has been intended to help broker-dealer members who lost money from auction process errors. He added that exchange wasn’t responsible for retail and institutional investors decisions and at the end the day, they’re not trying to take away business with the plan.
Greifeld added, “We cut fees and the people will get the reduced fees. They don’t have to give us any more market share. Our market share could be constant or decline and people will still get paid. We are offering this to our customers that transact with us every day. They do not have to give us one incremental share for them to earn this payment.”
Others Don’t Support the Plan
Other non-supporters for the plan include large wholesaler Knight Capital Group Inc. (NYSE:KCG). The company has an estimated $35 million in losses from the IPO, according to a May 23 government filing. They are joined by the four biggest U.S equity wholesalers who may see combined loses of $120 million; their order flow came from brokers including TD Ameritrade Holding Corp. (NYSE:AMTD) and Charles Schwab Corp (NYSE:SCHW).
Marketmakers were also hit with losses. Citadel LLC lost up to $35 million its market- making unit, reported Bloomberg. This list grows with UBS AG (USA) (NYSE:UBS) at $30 million and Citigroup Inc. (NYSE:C) at $20 million from its retail customers and its wholesaling businesses.
Knight said of Nasdaq’s plans, “Clearly, we are disappointed that Nasdaq’s compensation fund does not come close to covering reported losses from broker-dealers like Knight. Their proposed solution to this problem is simply unacceptable. As previously stated, the company is evaluating all remedies available under law.”
Other disapproving financial companies and exchanges are executives from Bats Global Markets Inc. and Direct Edge Holdings Inc., the largest U.S. equity market operators after NYSE and Nasdaq; they said they will oppose the plan.
But does NYSE have a point about Nasdaq’s actions? Is this just the beginning for IPOs gone wrong and exchanges? Is this a new exchange buyer beware?
With so many affected players in the Facebook Inc (NASDAQ:FB) IPO process, Nasdaq is just one spoke in the trading wheel. So is Knight Trading. So is Citadel. And so is NYSE Euronext.
Yes Nasdaq’s actions set a precedent with the payment plan but its one for the industry as whole. You could say they’re just taking one for the team.