NASDAQ has agreed to pay a record $10 million penalty to settle charges it mishandled the Facebook IPO. Learn more.
NASDAQ has agreed to pay a record $10 million penalty to settle charges that “poor systems and decision-making” disrupted trading during Facebook’s initial public offering last May, the U.S. Securities and Exchange Commission announced today.
The NASDAQ and other exchanges are obligated to manage an IPO without disrupting trading, but design limitations caused more than 30,000 Facebook orders to become “stuck” in the NASDAQ system for more than two hours when they should have been promptly filled, the SEC said in a statement. Once NSADAQ officials became aware of delays in matching IPO buy and sell orders, they made “ill-fated decisions” leading to rules violations.
In a “Code Blue” conference call members of the NASDAQ senior leadership team decided to proceed with the start of secondary market trading of Facebook shares on the mistaken assumption that they had fixed the problem, according to the SEC, the federal agency charged with ensuring fair and orderly financial markets. In the ensuing fallout, the exchange violated several rules, including the “price/time” priority for executing trade orders.
“This action against NASDAQ tells the tale of how poorly designed systems and hasty decision-making not only disrupted one of the largest IPOs in history, but produced serious and pervasive violations of fundamental rules governing our markets,” said George S. Canellos, Co-Director of the SEC’s Division of Enforcement.
“Too often in today’s markets, systems disruptions are written off as mere technical ‘glitches’ when it’s the design of the systems and the response of exchange officials that cause us the most concern,” said Daniel M. Hawke, Chief of the SEC Enforcement Division’s Market Abuse Unit.
The glitch caused the match of buy and sell orders to fall 19 minutes behind and resulted in more than 38,000 orders placed between 11:11 a.m. and 11:30 a.m. on May 18, 2012 to be excluded from “the cross.” About 8,000 of the orders were entered at 11:30, and the remaining 30,000 became stuck. The technical issues also delayed processing of 365 orders for Zynga shares.
Further violations occurred when NASDAQ took a short position in more than three million shares of Facebook in an unauthorized error account. The exchange subsequently covered the position and realized $10.8 million in profit, the second of five rule violations for the day. The SEC enforcement action extends to an affiliated third-party broker-dealer, NASDAQ Execution Services, for failing to maintain sufficient net capital reserves on the day of the Facebook IPO.