SEC Settles With Nasdaq Over Facebook IPO


In spite of recognizing that Facebook's initial public offering would probably be one of the largest in history, "a design limitation in Nasdaq's system to match IPO buy and sell orders caused disruptions," resulting in significant disruptions to the IPO, according to a statement today from the SEC.

As a result of its "rules violations," Nasdaq has agreed to settle the dispute for a record $10 million, the largest fine ever reached with an exchange, according to the SEC. In the statement, the SEC said that exchanges "have an obligation to ensure that their systems, processes, and contingency planning are robust and adequate to manage an IPO without disruption to the market."

According to the SEC, after holding a "Code Blue" meeting before the Facebook IPO, Nasdaq executives concluded that they had isolated and fixed the "system limitation" and opted to move forward with the IPO. Doing so without understanding the basis of the problem resulted in multiple rules violations, according to the SEC, including the price/time priority for executing trades. The upshot of the system's shortcomings was that more than 30,000 Facebook trade orders were stuck for as long as two hours before being executed. The SEC noted additional violations as well, including the use of an unauthorized error account to short Facebook stock.

George Canellos, co-director of the SEC's Division of Enforcement, said, "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."

In a statement filed Wednesday with the SEC, NASDAQ OMX CEO Robert Greifeld said, in part, "Prior to May 18, 2012, NASDAQ had conducted more than a hundred IPOs using the same or similarly designed systems, without incident. While we prepared extensively for the Facebook initial public offering, including thorough tests of our systems with member firms, the challenges we encountered that day were unprecedented." He went on to outline the steps NASDAQ has taken to address problems and said "We recognize that the cornerstone of a market is investor confidence. As such, our mission remains: developing the best technology, and operating the most reliable and efficient marketplaces in the world -- every day."


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