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SEC Approves Nasdaq Payback Plan for Botched Facebook IPO

UBS, Citi and others are not pleased with the $62 million settlement and may still sue.

It was the first exciting IPO in the midst of a grinding recession and a wobbly recovery that was going to make millions and millions for everyone involved. It featured the leader of the social media landscape, an exchange with a sterling reputation and a rock-solid IT backbone and thousands of investors eager to get a piece of a long-awaited IPO. What could go wrong?

As we soon found out, everything.

[What will Mary Jo White's SEC Look like? Advanced Trading takes a look.]

On May 18th of last year when shares of Facebook went live on Nasdaq, trading was soon halted due to serious stresses of Nasdaq’s IT systems. And now, the Securities and Exchange Commission (SEC) has approved a plan for Nasdaq to pay back its disgruntled clients.

And no one is smiling.

The SEC has approved Nasdaq’s $62 million payment plan to unhappy investors provided they give up their right to sue the market marker for its errors. Reuters notes that "the Nasdaq plan will give retail market makers far less than the $500 million in estimated losses from Facebook's initial public offering."

UBS officials are not pleased. The Swiss bank claims it lost $356 million on Facebook's debut in what it calls "the grossly mishandled IPO" and they want their money back in its entirety. The Wall Street Journal reports that "the bank has already filed a demand for arbitration against Nasdaq with the Financial Industry Regulatory Authority."

[Minding the Boys - Operational Risk on the Trading Floor.]

On the other hand Citi, Knight Capital -- which knows a thing or two about technology glitches -- and HFT trading firm Citadel have differing reactions to the compensation plan. Knight approved the plan but still wants the right to sue while Citadel reportedly has signed on to the deal.

While the $62 million pricetag may not compare to the hundreds of millions Nasdaq allegedly lost that day, it might be the only amount the market maker can pay.

Tamar Frankel, a Boston University professor who teaches securities law, tells Reuters that If Nasdaq had to pay back the entire Facebook tab, it might bankrupt the exchange. And that could push more trading into dark pools, which are a major competitor to Nasdaq.

Now this would be ironic: A spectacular trading technology glitch could send clients into a trading venue that is even less transparent than a major market maker.

One word of advice: Test those systems, folks.

Phil Albinus is the former editor of Advanced Trading and he currently edits the FierceFinanceIT newsletter. Follow him on Twitter at @philalbinus.

Phil Albinus is the former editor-in-chief of Advanced Trading. He has nearly two decades of journalism experience and has been covering financial technology and regulation for nine years. Before joining Advanced Trading, he served as editor of Waters, a monthly trade journal ... View Full Bio

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