Nasdaq is to pay a US$10 million penalty over its botched handling of the Facebook initial public offering.
The U.S. Securities and Exchange Commission (SEC) charged Nasdaq with securities laws violations resulting from, what the SEC says was its poor systems and decision-making during the Facebook IPO, and secondary market trading of its shares. The exchange agreed to settle the SEC’s charges by paying a US$10 million penalty, which is the largest ever by an exchange.
According to the SEC’s order instituting settled administrative proceedings against Nasdaq, a design limitation in the exchange’s system to match IPO buy and sell orders caused disruptions to the Facebook IPO. And, the SEC says that it then made some ill-fated decisions that led to rules violations.
For example, it notes that Nasdaq decided not to delay the start of secondary market trading with the expectation that they had fixed the system limitation by removing a few lines of computer code. “However, they did not understand the root cause of the problem,” it says; and, this decision to initiate trading before fully understanding the problem caused violations of several rules, including the fundamental rule governing the price/time priority for executing orders, which caused more than 30,000 orders to remain stuck in Nasdaq’s system for more than two hours when they should have been promptly executed or cancelled.
“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 Canellos, co-director of the SEC’s division of enforcement.
Nasdaq, and its affiliated third party broker-dealer Nasdaq Execution Services (NES) agreed to a settlement without admitting or denying the SEC’s findings. The SEC order censures Nasdaq and NES, imposes a US$10 million penalty on Nasdaq, and requires both Nasdaq and NES to cease and desist from committing or causing these violations and any future violations.It also requires them to complete numerous undertakings.