NASDAQ OMX Group, Inc. (NASDAQ:NDAQ) has officially been charged by the Securities and Exchange Commission in connection with Facebook Inc (NASDAQ:FB)’s botched initial public offering. According to a press release from the agency, the company has agreed to pay a fine of $10 million, which is the largest fine ever levied against an exchange.
Details On The Charges Against NASDAQ
The SEC said it charged NASDAQ OMX Group, Inc. (NASDAQ:NDAQ) with violations of securities laws in connection with its “poor systems and decision-making” on the day of Facebook Inc (NASDAQ:FB)’s IPO. Exchanges like NASDAQ are obligated to make sure that their systems and processes are able to handle an IPO without disrupting the market.
The agency said even though it was widely expected that Facebook Inc (NASDAQ:FB)’s IPO would be one of the biggest in history and have massive amounts of investors taking part, there was a design limitation in NASDAQ’s system. According to the SEC, that limitation created disruptions in the IPO because of the system was limited in its ability to match IPO buy and sell orders.
Officials said NASDAQ OMX Group, Inc. (NASDAQ:NDAQ) “then made a series of ill-fated decisions that led to the rules violations.”
NASDAQ’s ‘Ill-Fated Decisions’ On Facebook’s IPO
According to regulators, the exchange’s senior management held a “Code Blue” conference call to discuss delaying the beginning of secondary market trading in Facebook. They decided not to delay it though because they believed they had fixed the limitation in the system by simply removing some lines of code.
The SEC said however, that management didn’t fully understand where the root of the problem was. The agency said that choosing to start trading before there was a complete understanding of the problem resulted in “violations of several rules.” One of the rules regulators said that was violated was the basic rule of NASDAQ which governs the price / time priority when executing trade orders.
The issue resulted in “more than 30,000 Facebook Inc (NASDAQ:FB) orders to remain stuck in NASDAQ’s system for more than two hours when they should have been promptly executed or cancelled.” The same issue also caused 365 orders for shares of Zynga Inc (NASDAQ:ZNGA) to fail at the same time.
Other Violations By NASDAQ In Connection With Facebook IPO
The SEC said NASDAQ OMX Group, Inc. (NASDAQ:NDAQ) also violated other rules by assuming a short position in Facebook Inc (NASDAQ:FB) of over three million shares through an error account. The exchange’s rules don’t allow error accounts to be used for any purpose. It covered the short position and managed to turn a profit of about $10.8 million, which regulators said was a further violation.
Officials said there were also three other ways the company violated its rules during Facebook’s IPO period, although they did not go into further detail about them.