The SEC said several members of Nasdaq's senior leadership team convened a "Code Blue" conference call at the SEC's request and, thinking that they had fixed the problem by removing a few lines of code, chose not to delay the start of secondary market trading in Facebook shares.
But they had not grasped the root cause, the SEC said. The decision to resume trading without fully understanding the problem resulted in violations of several rules, according to the SEC, including Nasdaq's own rule governing the price/time priority for executing trade orders.
Trading was delayed until 11:30 a.m. the day of the IPO. Confirmation of the initial trades didn't post until 1:50 p.m. That left more than 30,000 Facebook orders stuck in Nasdaq's system for more than two hours when they should have been promptly executed or canceled, the SEC said.
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The SEC also said Nasdaq broke its own rules when it assumed a short position of more than three million Facebook shares in an "unauthorized error account." The exchange then covered that short position for about $10.8 million, which also violated its rules. The regulator cited three other violations of Nasdaq's own rules during the opening of trading.
The SEC also charged Nasdaq's affiliated third-party broker-dealer, Nasdaq Execution Services, with failing to maintain sufficient net capital reserves on the day of the IPO as a result of that big short position in the unauthorized account.