Sheri Qualters writes for The National Law Journal, an American Lawyer affiliate.
The NASDAQ OMX Group agreed Wednesday to pay the U.S. Securities and Exchange Commission a $10 million penalty to settle charges related to "poor systems and decision-making" during Facebook Inc.’s initial public offering and subsequent trading.
The SEC called the penalty "the largest ever against an exchange."
The agency noted that, despite a general expectation that that Facebook’s IPO would be among the largest ever, a flaw in NASDAQ’s system for matching IPO buy and sell orders caused disruptions. "NASDAQ then made a series of ill-fated decisions that led to the rules violations," the SEC said.
Stephen Kastenberg of Ballard Spahr represented NASDAQ.
"Too often in today’s markets, systems disruptions are written off as mere technical glitches’ when it’s the design of the systems and the response of exchange officials that cause us the most concern," Daniel Hawke, chief of the SEC enforcement division’s market abuse unit, said.
The SEC noted that after the problems emerged, senior NASDAQ leaders decided during a conference call not to delay secondary market trading.That led to several rules violations. Additionally, more than 30,000 Facebook orders were stuck in NASDAQ’s system for more than two hours instead of being executed or cancelled right away. Another 8,000 orders were delayed from being entered into the auction from 11:11 a.m. to 11:30:09 a.m.
In an open letter Wednesday, NASDAQ chief executive Robert Greifeld said that before Facebook’s May 18, 2012, IPO, the exchange had run more than a hundred IPOs "using the same or similarly designed systems, without incident."
He continued, "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."
NASDAQ detailed a number of changes to its system and personnel, including a new chief information officer and global head of market systems; a change to the electronic auction mechanism for IPOs and market openings and closings; new global processes for making technology changes; deployment of an engineering team to monitor and analyze daily system performance; and a new quality assurance organization to testthe trading systems.
