Nasdaq to Compensate Firms for Botched Facebook IPO

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Emmanuel Dunand, AFP/Getty Images
By John McCrank

NEW YORK -- Nasdaq OMX Group will compensate firms on Dec. 31 for qualifying claims related to Facebook's (FB) botched May 2012 initial public offering, the exchange operator said in a note to traders Friday.

Nasdaq (NDAQ) said previously it would pay up to $41.6 million in claims to market participants that lost money when a glitch in Nasdaq's system during the IPO prevented timely order confirmations for many traders, leaving them unsure about their exposure for hours and, in some cases, for days afterwards.

Nasdaq said a total of $41.6 million in claims qualified for compensation, even though market makers estimated they lost $500 million collectively.

Firms that qualified for compensation had until December 23 to agree not to sue Nasdaq over the IPO in order to be eligible for a one-time voluntary payout.

While Nasdaq was fined $10 million by the U.S. Securities and Exchange Commission, the largest fine ever for an exchange, the snafu was just one of a raft of high-profile technology glitches that have plagued exchanges in recent years.

In August a software bug paralyzed thousands of Nasdaq-listed stocks marketwide for three hours. %VIRTUAL-article-sponsoredlinks%That happened just days after a technical problem at Goldman Sachs (GS) sent a flood of erroneous orders to the U.S. equity options markets.

After the Nasdaq outage, the U.S. Securities and Exchange Commission called the heads of all of the exchanges to Washington to discuss ways to strengthen critical market infrastructure and improve its resilience when technology fails.

Other major glitches include BATS Global Markets' botching of its own market debut, which it had to abandon, just months before Facebook's IPO. And on Aug. 6, the exchange operator faced an outage on one of its markets of nearly an hour.

CBOE Holdings Inc experienced a glitch in April that shut down the Chicago Board Options Exchange, the No. 1 U.S. stock-options market, for half a day, preventing trading in options on two of the U.S. market's most closely watched indexes.

At IntercontinentalExchange Group's NYSE Euronext unit, a bug in new software being rolled out in September briefly led to a trading halt across U.S. options markets.

Nasdaq to Compensate Firms for Botched Facebook IPO

Warren Buffett is a great investor, but what makes him rich is that he's been a great investor for two thirds of a century. Of his current $60 billion net worth, $59.7 billion was added after his 50th birthday, and $57 billion came after his 60th. If Buffett started saving in his 30s and retired in his 60s, you would have never heard of him. His secret is time.

Most people don't start saving in meaningful amounts until a decade or two before retirement, which severely limits the power of compounding. That's unfortunate, and there's no way to fix it retroactively. It's a good reminder of how important it is to teach young people to start saving as soon as possible.

Future market returns will equal the dividend yield + earnings growth +/- change in the earnings multiple (valuations). That's really all there is to it.

The dividend yield we know: It's currently 2%. A reasonable guess of future earnings growth is 5% a year. What about the change in earnings multiples? That's totally unknowable.

Earnings multiples reflect people's feelings about the future. And there's just no way to know what people are going to think about the future in the future. How could you?

If someone said, "I think most people will be in a 10% better mood in the year 2023," we'd call them delusional. When someone does the same thing by projecting 10-year market returns, we call them analysts.

Someone who bought a low-cost S&P 500 index fund in 2003 earned a 97% return by the end of 2012. That's great! And they didn't need to know a thing about portfolio management, technical analysis, or suffer through a single segment of "The Lighting Round."

Meanwhile, the average equity market neutral fancy-pants hedge fund lost 4.7% of its value over the same period, according to data from Dow Jones Credit Suisse Hedge Fund Indices. The average long-short equity hedge fund produced a 96% total return -- still short of an index fund.

Investing is not like a computer: Simple and basic can be more powerful than complex and cutting-edge. And it's not like golf: The spectators have a pretty good chance of humbling the pros.

Most investors understand that stocks produce superior long-term returns, but at the cost of higher volatility. Yet every time -- every single time -- there's even a hint of volatility, the same cry is heard from the investing public: "What is going on?!"

Nine times out of ten, the correct answer is the same: Nothing is going on. This is just what stocks do.

Since 1900 the S&P 500 (^GSPC) has returned about 6% per year, but the average difference between any year's highest close and lowest close is 23%. Remember this the next time someone tries to explain why the market is up or down by a few percentage points. They are basically trying to explain why summer came after spring.

Someone once asked J.P. Morgan what the market will do. "It will fluctuate," he allegedly said. Truer words have never been spoken.

The vast majority of financial products are sold by people whose only interest in your wealth is the amount of fees they can sucker you out of.

You need no experience, credentials, or even common sense to be a financial pundit. Sadly, the louder and more bombastic a pundit is, the more attention he'll receive, even though it makes him more likely to be wrong.

This is perhaps the most important theory in finance. Until it is understood you stand a high chance of being bamboozled and misled at every corner.

"Everything else is cream cheese."
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