An apology and $40 million. That was the first step Nasdaq OMX Group took toward making amends for the unprecedented trading delays and glitches that marred last month's Facebook IPO. But considering that the exchange operator still faces shareholder lawsuits, regulatory examination and – most of all – a lack of confidence among Silicon Valley startups, there is a lot more work to be done.
Nasdaq OMX announced on Tuesday it would offer $40 million, subject to SEC approval, to compensate member firms that lost money during the first chaotic hours of Facebook's debut on the exchange. $13.7 million of the payout will be in cash and the remainder will come in the form of trading discounts over the next six months.
Later in the day, CEO Robert Greifeld appeared on CNBC to issue an apology to the financial industry, proclaim his embarrassment and vow to make Nasdaq OMX a “better, stronger organization.”
The initial reaction, however, seemed to be gasoline on the fire. Archrival NYSE, which stands to gain the most from Nasdaq's embarrassment, declared the discounts unfair and “an undue burden on competition” (which is questionable, considering the discounts are unlikely to increase Nasdaq's market share.)
Broker dealers weren't happy either. Knight Capital, which lost as much as $35 million from the Nasdaq malfunction, said it was disappointed that the fund “does not come close to covering reported losses.” All told, the broker dealers who are Nasdaq customers say the snafu cost them more than $125 million.
On CNBC, Greifeld pointed out that Nasdaq's voluntarily compensation is above and beyond what any exchange has ever done before. “Many exchanges around the planet have had issues through the years,” he said. “This is the first time an exchange is coming through, even though it's not part of our accommodation policy.”
But that may be because there has never been a trading glitch quite like this. “This was something of an entirely new order of magnitude. A global error like this has never happened before,” said Michael Robinson, an executive vice president at Levick Strategic Communications, who previously worked at the SEC and Nasdaq. “This is Nasdaq's biggest unforced error ever.”
Although Nasdaq did extensive testing of its IPO auctioning system, the tests didn't reveal a design flaw in the IPO cross (an auction process that determines the opening price). Nasdaq OMX is limiting compensation to three types of transactions affected by the IPO cross: Sell orders priced at or below $42 a share that didn't execute; sell orders priced at or below $42 that didn't execute; and buy orders priced at $42 that were executed but not immediately confirmed
“This is first step forward,” said Robinson. “But it's just the first step in a long march of a thousand steps that it needs to take.” Starting with regaining the loyalty of investment banks, many of which are also broker dealers who were burned in the Facebook IPO. “When startup companies decide to go public, they go to their bankers and ask where they should list,” Robinson said.
But Greifeld still has his work cut out for him. Nasdaq OMX needs to ensure an error like this will never happen again. Toward that end, it's hired IBM to review its systems. But many executives in Silicon Valley have privately said they won't list their firms on Nasdaq as long as Greifeld is working there.
And it's not helping Greifeld's case when he is reported to have said he can't wait until his life gets back to normal. From the way people are responding to the $40 million fund and his apology, normal may be a long time off.