(Revises throughout, adds Knight comments.)
By Brett Philbin
NYSE Euronext (NYX) and Knight Capital Group Inc. (KCG) sharply
criticized Nasdaq OMX Group Inc.'s (NDAQ) proposed $40 million fund
to compensate trading firms that lost money from botched trades
during Facebook Inc.'s (FB) tumultuous market debut.
In a statement late Wednesday, NYSE Euronext said that while it
hasn't seen Nasdaq's full plan, the proposal "would be wholly
inconsistent with fair practice and an undue burden on competition
to allow NASDAQ to use pricing and other machinations as a guise
for fairly compensating those impacted by the Facebook IPO
issues."
Earlier Wednesday, Nasdaq announced the highly anticipated plan,
saying it would pay $13.7 million in cash to member firms that
suffered losses, including the $10.7 million profit it made from
first-day trading in Facebook and the maximum $3 million allowed
under its rules to make good for botched trades.
The rest of the payments--the basis of the NYSE's ire--would
come from trading discounts, which Nasdaq said would cover the
Facebook losses within six months "for the vast majority of
firms."
In its statement, the NYSE said "such a tactic would potentially
strongly incent customers to divert order flow to Nasdaq in order
to receive compensation to which they are entitled, and allow
Nasdaq to reap a benefit from market share gains they would not
have otherwise received."
The NYSE said the plan would "establish a harmful precedent that
could have far-reaching implications for the markets, investors and
the public interest."
Technology glitches during Facebook's IPO delayed the social
networking company's opening trade more than 30 minutes on May 18
and left brokers with millions of unconfirmed trades.
Market makers, retail brokerages and trading firms had been
awaiting word of a reimbursement process from Nasdaq for more than
two weeks. Losses for wholesale market makers--firms who execute
orders for individual investors supplied by their
brokerages--including Knight Capital, UBS AG (UBS, USBN.VX) and
Citigroup Inc. (C), have collectively been estimated at more than
$100 million, according to people familiar with situation.
In a statement, Knight Capital--which had said it may suffer
losses of up to $35 million linked to its trading in
Facebook--said, "Clearly, we are disappointed that Nasdaq's
compensation fund does not come close to covering reported losses
from broker-dealers like Knight who traded Facebook shares on
behalf of average investors the day of the IPO, and who suffered
losses as a result of Nasdaq's failures in connection with this
IPO."
A Knight spokeswoman said Nasdaq's "proposed solution to this
problem is simply unacceptable. As previously stated, the company
is evaluating all remedies available under law."
Among other reactions to the Nasdaq plan, privately held retail
brokerage Scottrade Inc. said it will "carefully review the details
of the plan to understand how it may impact the firm and our
clients and determine the appropriate course of action."
Representatives from Goldman Sachs Group, Inc. (GS) and Wells
Fargo & Co. (WFC) declined to comment.
-Write to Brett Philbin at brett.philbin@dowjones.com
--Ben Fox Rubin contributed to this article.