Nasdaq OMX Group proposed a "one-time" payout of about $40 million to compensate some financial firms that suffered losses from botched trades during the Facebook IPO.
"We have been embarrassed and certainly we've apologized to the industry" over the Facebook IPO, Nasdaq CEO Robert Greifeld said in an interview with CNBC.
The planned payouts, which involve a mix of cash and trading discounts, will be subject to approval from the U.S. Securities and Exchange Commission .
The amount is far lower than the $100 million or more that the firms said they lost due to the technical problems surrounding Facebook's debut.
The idea of rebates has caused some concern at other exchanges. Sources at Nasdaq rivals said that such a plan would force brokers to trade at Nasdaq, taking market share from competing exchanges.
In a statement, the New York Stock Exchange said "it would be wholly inconsistent with fair practice and an undue burden on competition" to allow Nasdaq to offer such compensation.
"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. "This is tantamount to forcing the industry to subsidize Nasdaq's missteps and would establish a harmful precedent."
Nasdaq said it would dole out $13.7 million in cash to member firms that suffered losses. The amount includes $10.7 million in profit that Nasdaq made during the first day of trading and the maximum $3 million sanctioned by regulators to correct for trading snafus.
The remainder would be from trading discounts seen vesting over six months.
The top four market makers in the $16 billion Facebook IPO — UBS, Citigroup, Knight Capital Group, and Citadel Securities — together lost upward of $115 million due to technical problems that prevented them from knowing for about two hours if their orders had gone through after Facebook began trading.
Knight Capital put out a statement in response to Nasdaq's plan, calling it "simply unacceptable."
"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," Knight said, reiterating that the company is "evaluating all remedies available under law.”
Smaller market makers that might have suffered losses would also receive a part of the $40 million Nasdaq proposes. Two senior executives in the financial industry have said they expect Nasdaq member claims to total $150 million to $200 million.
"Our expectation is that every firm will receive some measure of cash and that every firm will receive their full accommodation by year end if current trading patterns persist," Eric Noll, executive vice president for transaction services at Nasdaq OMX, said in a webcast to member firms.
Under the plan, investors who attempted to buy the company's shares at $42 or less, but whose orders were not executed, would be eligible for compensation. In addition, trades that were executed at an inferior price would also be eligible, as well as trades that did go through successfully but were not confirmed because of Nasdaq's technical problems.
A filing with the U.S. Securities and Exchange Commission is expected soon.
"They clearly screwed up. They clearly owe their customers money," said former SEC Chairman Arthur Levitt. He declined to comment on whether the situation warranted an SEC investigation or fine.
Another former SEC chairman, Harvey Pitt, welcomed the Nasdaq OMX initiative, but he called it too limited. "But I think the steps it has taken — while positive — are too limited. The dollar estimates for harm caused by Nasdaq's failures easily exceed — several times over — the $40 million it has set aside," he said on Wednesday in response to an email query.
Nasdaq's Noll said the exchange is still engaged in a review process with the SEC. It is unclear how long that process will take or how long the SEC will take to decide if Nasdaq's proposal for compensation is adequate.
He said that the factors that went into determining the $40 million figure included the exchange's liability cap of $3 million a month, Nasdaq's proceeds of $10.7 million from the Facebook IPO, and an estimated $7 million in revenue forecast over the next five years from Facebook trading and listing fees.
During the first day of Facebook trading, technical glitches left the market makers — who facilitate trades for brokers and are crucial to the smooth operation of stock trading — in the dark for hours as to which trades had gone through.
Nasdaq's immediate response amounted to a members-only call with one of its executive vice presidents and a statement that the exchange would set aside a pool of $13.7 million to accommodate losses.