--Nasdaq plans mix of cash, trading-fee discounts to make up
losses
--Proposal requires approval by the Securities and Exchange
Commission
--NYSE Euronext objects to trading-fee discounts to make up
losses
(Adds Nasdaq OMX CEO comments from CNBC interview, Knight
statement.)
By Doug Cameron and Jacob Bunge
Nasdaq OMX Group Inc. (NDAQ) on Wednesday outlined plans for a
"one-time" payout of around $40 million to compensate some
financial firms that lost money after the exchange operator botched
their trades during the ill-fated debut of Facebook Inc. (FB)
shares. The plan involves a mix of cash and trading discounts aimed
at easing the exchange's reputational damage from the technical
problems that plagued Facebook's initial public offering last month
and left brokers with unwanted trading positions, though Nasdaq OMX
has insisted it isn't to blame for the sharp slide in the
social-media company's valuation.
The planned payouts are subject to approval by the Securities
and Exchange Commission and fall well below the $100 million or
more that financial firms said they lost because of the technical
problems. The payouts also stirred objections from a rival
exchange.
"It's clear, it's clinical, it's objective," said Nasdaq OMX
Chief Executive Bob Greifeld in an interview on CBNC Wednesday.
Greifeld said he had been in touch with top executives from firms
damaged by his exchange's problems.
Mr. Greifeld said Nasdaq would come out of the episode "a
stronger, better organization."
Earlier Wednesday, Nasdaq said it would pay $13.7 million in
cash to member firms that suffered losses, including the $10.7
million-profit the exchange made from first-day trading and the
maximum $3 million allowed by regulators to make good for trading
snafus. The rest would come in the form of trading discounts seen
vesting over six months, with the push to pay out more than the $3
million-cap set by regulators, raising concerns among rivals that
it would set an unwelcome precedent. The move essentially aims to
encourage brokers hit by the Facebook IPO glitches to send their
trades to Nasdaq's markets. The estimated cost to Nasdaq OMX is
around two quarters of pre-tax earnings, though the company could
recoup some of this if fee discounts spur more trading.
Knight Capital Group Inc. (KCG), which has estimated trading
losses of up to $35 million from the glitches, called the proposal
"unacceptable" in a statement and said it "does not come close to
covering losses by broker-dealers like Knight that 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
the IPO."
In a separate statement, NYSE Euronext (NYX) blasted Nasdaq's
plan on trading fees, saying it appeared "wholly inconsistent with
fair practice and an undue burden on competition" to allow Nasdaq
OMX to rely on pricing to compensate losses. "This is tantamount to
forcing the industry to subsidize Nasdaq's missteps and would
establish a harmful precedent that could have far-reaching
implications for the markets, investors and the public interest,"
representatives for NYSE said.
The payout plan will be overseen by the Financial Industry
Regulatory Authority, or Finra, which will evaluate claims, though
the agency has said Nasdaq OMX will make the final decision. Nasdaq
OMX said compensation would be limited to claims fitting a number
of criteria and won't be extended to "losses that resulted from
affirmative decisions by members."
Mr. Greifeld told CNBC that the exchange company arrived at the
figure after rerunning the opening trade in Facebook's stock and
determining which trades should have been carried out that
weren't.
The company outlined three types of transactions that would
qualify, including sell orders priced at or below $42 a share that
didn't execute. Sell orders priced at or below $42 a share that
executed at an inferior price, and buy orders priced at $42 that
were executed but that weren't immediately confirmed would also be
considered for what Nasdaq described as "accommodations."
Retail brokers facing claims from individual investors are, in
turn, seeking redress from the market-makers that handled trades,
while several class-action suits seeking financial redress have
also been filed. Problems with Nasdaq OMX exchange systems handling
the May 18 opening of Facebook shares delayed the hugely
anticipated debut by 30 minutes and left brokers with millions of
shares' worth of unconfirmed trades. Firms didn't learn the results
of their orders until more than two hours after the stock opened,
and some were caught by surprise when they were notified by Nasdaq
of unexpected positions in the social-networking company's newly
listed stock.
Nasdaq said it has hired International Business Machines Corp.
(IBM) to review its trading systems.
--Chris Dieterich contributed to this article.
Write to Doug Cameron at Doug.Cameron@dowjones.com and Jacob
Bunge at Jacob.Bunge@dowjones.com.
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