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Nasdaq Confronts Liability On Traders' Losses In Facebook IPO

By Jacob Bunge Of DOW JONES NEWSWIRES Nasdaq OMX Group Inc. (NDAQ) on Monday faces demands from irate brokers and traders that want the exchange group to make up losses driven by its mishandling of Friday's initial public offering of Facebook Inc. (FB). The exchange operator hopes to earmark at least $13 million to resolve bad trades, according to a spokesman for the company, but this may undershoot total losses sustained by brokers who made up losses for retail and institutional investors that had trades affected by the Facebook IPO glitches. Tom Joyce, chief executive of market-making firm Knight Capital Group Inc. (KCG), on Monday estimated in an interview on CNBC that total losses from the episode may hit $100 million across all impacted firms. "Dozens of firms lost money," said Joyce, whose staff worked over the weekend to address millions of mismatched Facebook shares following Friday's glitches. About 30 million shares' worth of trading were impacted during the pre-IPO period, according to Eric Noll, head of transaction services for Nasdaq OMX. He said on a call with reporters on Sunday that around half of the affected shares would "have some level of dispute." Senior Nasdaq OMX executives said Sunday that they aimed to use $10 million in proceeds from the exchange's own position in Facebook shares--acquired by the exchange Friday as its staff worked to resolve the delay in Facebook's stock opening--to augment a standing $3 million cap on payouts to customers that demonstrate losses as a result of failures in Nasdaq OMX's systems. Shares in Nasdaq OMX were flat at $22.00 in early trading Monday after closing 4.4% lower Friday. Bob Greifeld, chief executive of Nasdaq OMX, told reporters Sunday that brokers could not expect every single trade to be made good because in some instances there were not enough shares available at the prices sought. He also defended Nasdaq's handling of the matter. "Our outreach to investors and customers was at an all-time high level," said Greifeld. "What you're hearing is some basic frustration with the message." Pain borne by brokers and traders due to the mishandled IPO comes at a time when many Wall Street firms already have been struggling to make profits from dealing in equities. Investors this year have continued to pull money out of mutual funds and overall stock-trading activity in the first quarter fell to its lowest level since 2007. On Friday, problems with the Nasdaq Stock Market's IPO mechanism played into a 30-minute delay of the offering and led to an approximate 20-minute period in which the exchange stopped confirming new orders in Facebook shares, as well as cancellations or changes to standing orders. Brokers and traders who entered orders on behalf of institutions and retail investors did not learn the results of the trading until more than two hours later--and then the results were in many cases not what the firms expected. That put the onus on brokers to determine whether or not to make customers good on trades they thought had been completed hours earlier. Wholesale market makers, the major electronic order-handling operations that handle the trading of individual investors, were seen among the worst-hit by Nasdaq's glitches due to the large number of orders that needed to be fixed for customers eager to trade in Facebook's public-market debut. After an attempted after-hours auction on Friday to resolve the disputed trades resulted in "nothing done," according to a notice sent to traders, Nasdaq OMX officials told clients they would have to seek "accommodation" through the exchange's rules for handling disputed transactions. In such situations, brokers can petition the exchange to get compensation for losses proven to result from failures of Nasdaq OMX's systems. Such accommodations must be sought by 12 p.m. EDT Monday. Under exchange rules, Nasdaq's total payout to affected customers tops out at $3 million in one calendar month. To this figure Nasdaq seeks to add $10 million the exchange made from trading out of a position in Facebook shares that Nasdaq took on Friday morning in order to resolve the technical issue that delayed the IPO. The Securities and Exchange Commission will have to sign off on the plan, Nasdaq OMX executives said Sunday. -By Jacob Bunge, Dow Jones Newswires; 312 750 4117; jacob.bunge@dowjones.com; Twitter: @jacobbunge

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