--NYSE: Nasdaq proposal 'wholly inconsistent with fair
practice'
--Knight Capital: Nasdaq proposal 'simply unacceptable'
--Some consider Nasdaq move an opening gambit in drawn-out
process
(Adds quote from online broker TradeKing, background, beginning
in 11th paragraph.)
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 disclosed 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 that Nasdaq
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 initial public offering on
May 18 delayed the social-networking company's opening trade more
than 30 minutes 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 which execute
orders for individual investors supplied by their
brokerages--including Knight Capital, UBS AG (UBS, USBN.VX) and
Citigroup Inc. (C), have been estimated at more than $100 million
collectively, 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 Capital spokeswoman said Nasdaq's "proposed solution to
this problem is simply unacceptable. As previously stated, the
company is evaluating all remedies available under law."
John Dominic, vice president of trading at online broker
TradeKing, said his firm was able to handle order problems in "real
time" with wholesale brokers like Knight Capital. He said he has
put the matter behind him and that TradeKing has resolved 100% of
disputed Facebook trades. The wholesalers adjusted prices and
fulfilled cancellations, he said, "and that's why we were able to
get the cleanup done early."
While TradeKing's trades were resolved, Fidelity Investments
continues to work through disputed Facebook trades. "Based on the
plan outlined by Nasdaq earlier today, we are working closely with
market makers and others to clarify what additional resolution, if
any, might be available for our customers," said spokesman Steve
Austin.
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."
A source at one bank involved in the Facebook IPO said that the
proposal put forward by Nasdaq appeared to be more of an opening
gambit than a final solution, and that it would likely evolve over
time.
Because the matter involves institutions with long-standing
relationships, "There will be back and forth," the source said.
"The good news here is this ends up being a dispute between
entities dealing with each other every day. It's not the proverbial
Joe Sixpack against the Nasdaq...I'm sure the Street is working
through this."
Regarding Nasdaq, the source added: "Them not doing everything
they should do is not a bullet point they want everyone talking
about for the next 20 years."
Representatives from Goldman Sachs (GS) and Wells Fargo &
Co. (WFC) declined to comment.
--Christian Berthelsen, Kaitlyn Kiernan, Ben Fox Rubin and Chris
Dieterich contributed to this article.
Write to Brett Philbin at brett.philbin@dowjones.com.