Rival exchanges on Thursday lashed out at Nasdaq OMX's $40 million (25.7 million pounds) plan to compensate clients for its mishandling of Facebook's initial public offering last month, calling the plan "illegal," "anti-competitive" and saying it was unlikely to be approved by U.S. regulators.
A day after Nasdaq rolled out its plan, which would mostly consist of trading discounts for clients, rival exchanges questioned the legitimacy of the proposal, and one of Nasdaq's biggest customers said the sum offered was not nearly enough.
Total losses by banks and brokerages due to the technical problems that plagued the $16 billion IPO may be as high as $200 million, said Thomas Joyce, chief executive of Knight Capital Group, a market maker in the deal that said it alone lost $35 million.
"I think that the scheme that was announced yesterday is illegal," Bill O'Brien, CEO of the No. 4 U.S. equities exchange, Direct Edge, said at Sandler O'Neill's brokerage and exchange conference in New York. "It is also a shameless attempt to basically turn a big investor-confidence-eroding event into a competitive advantage."
O'Brien, who was visibly upset, said his company would contest the plan and that he did not think it would be approved by the U.S. Securities and Exchange Commission. NYSE Euronext, the top U.S. stock exchange, also said it strongly objected to the plan.
Direct Edge, NYSE, and BATS Global Markets - which in March had to pull its own IPO due to technical problems - all denounced the plan as a grab for market share.
"Confusing compensation with a pricing promotion - that's a bad way to do it," said Mark Hemsley, chief executive of BATS Chi-X Europe.
Nasdaq's proposed $40 million compensation figure - $13.7 million in cash and the rest in trading discounts - was a big topic at the conference.
GREIFELD HOLDS HIS GROUND
Robert Greifeld, CEO of Nasdaq, made 30-minute presentation at the conference that did not touch on the Facebook problems until the very end when he reiterated that Nasdaq's board approved the plan and that it covered all of the losses that resulted from the exchange's errors.
"We don't really have any legal requirements," Greifeld said. "We have an accommodation policy approved by the SEC of up to $3 million, so we are going to go to the SEC to ask them to approve us to pay a lot more than that."
Nasdaq has been widely criticized for poor communications during and after the Facebook IPO, the most highly anticipated market debut in recent memory, and for failing to apologize for the technical problems in the first hours of trading of Facebook shares.
"It's hard to envision it having been handled more badly," said Jamie Selway, managing director of broker-dealer ITG.
The top four U.S. retail market makers - which facilitate trades for brokers and are crucial to the smooth operation of stock trading - say they lost upward of $115 million in the Facebook IPO because of trading glitches and a severe communications breakdown on Nasdaq's part.
The problems on Nasdaq's exchange led to a 30-minute delay of the IPO on May 18, after which market makers did not receive confirmations of their opening orders for two hours. Some orders were placed well after the opening cross, around 1:50 p.m. that day.
Facebook shares have fallen 31 percent from their offering price of $38, to $26.31 on Thursday. The steep drop has triggered questions over its IPO pricing.
"It's another one of those things that destroys confidence," said Fred Tomczyk, CEO of TD Ameritrade, the top U.S. retail brokerage by trading volume.
(Reporting by John McCrank and Herbert Lash; Editing by Jennifer Merritt and Steve Orlofsky)