Nasdaq OMX Group (NDAQ), facing heavy criticism and numerous lawsuits for mishandling the high-profile Facebook (FB) initial public offering, is proposing a $40 million fund to compensate some investors who lost money due to mistakes made by the Nasdaq Stock exchange.
As reported earlier by FOX Business, the proposal is a mix of cash payments and future transaction discounts on trades Nasdaq member firms make through the Nasdaq system, a move that could be controversial if it is challenged by the electronic exchange’s competitors such as the New York Stock Exchange.
In a statement released Tuesday, the exchange operator said the plan has to be approved by the Securities and Exchange Commission.
Both the boards of the Nasdaq OMX and the Nasdaq Stock Market have signed off on the one-time payment plan, described in the release as “a one-time voluntary accommodations program for qualifying members who were disadvantaged by technical problems that arose during the Facebook IPO cross on May 18.”
Traders said the technical problems, which delayed the opening of the stock for about 30 minutes, left them uncertain for hours whether their trades had been completed and at what price.
Under the proposal released Wednesday about $13.7 million would be paid in cash to member firms. The balance, according to the statement, would be credited to members to reduce trading costs via discounts. The Nasdaq said it expects to complete compensation to most injured firms within six months.
Financial Industry Regulatory Authority (FINRA), an independent securities industry regulatory body, has agreed to evaluate claims submitted by firms seeking compensation.
The Nasdaq said firms will qualify for compensation if they were “directly disadvantaged due to technical problems on the part of NASDAQ” before Facebook began trading at 11:30 a.m. that day, or if the firm “had uncertainty regarding their IPO cross position.”
The program will provide compensation for three kinds of orders placed during the IPO cross: sells priced at $42 or less that did not execute; sells priced at $42 or less that executed at an inferior price; buys priced at $42 that were executed in the cross but not immediately confirmed.
The Nasdaq said no compensation will be made for losses that resulted from “affirmative decisions by members, or in cases where members told investors that unconfirmed trades had been executed.”
Nasdaq OMX said IBM will conduct a review of its operating market systems.