[by Larry Goldfarb]

There a two ways that the Nasdaq OMX Group could be construed.  A private for profit enterprise or a surrogate government enterprise.  Not withstanding its bylaws, the exchanges liability is minimized by the ladder and maximized by the former.  As it proclaims beneficence and generosity  in its proposed $62 million plan to compensate firms affected by the fallout from Facebook's botched initial public offering, the firm is claiming that as representing the US government, it has limited liability.  Firms that like UBS AG, Citigroup Inc and other parties harshly disagree.

Major market makers and broker dealers say they lost upward of $500 million because of technical glitches during Facebook's May 18 stock market debut.  Nasdaq's plan to offer $62 million in cash to compensate those who lost money was an increase from earlier discussions, which would have included a $40 million payback fund, made up mostly of trading rebates. UBS Securities, an arm of the Swiss bank, said it lost more than $350 million in the botched IPO, and called the plan "woefully inadequate" in a letter to the SEC dated Aug. 22.

The firm said the types of claims for trading losses that Nasdaq agreed to compensate "should be expanded to include the full extent of losses caused by Nasdaq."  UBS said technical malfunctions from the IPO caused its systems to re-enter orders multiple times and left it with a huge position of unwanted stock.  Citi expressed similar discontent in its own scathing letter to the SEC in August in which it said Nasdaq's actions on the day of the IPO amounted to "gross negligence."  The No. 3 U.S. bank's market-making arm, Automated Trading Desk, is said to have lost around $20 million in the IPO.

In a letter to the SEC dated Sept. 17, Nasdaq said the proposed compensation pool "goes well beyond what is required under current Nasdaq rules." It noted that if the proposal is not approved, the applicable limit of liability under the approved rule would instead be $500,000 - less than 1 percent of the proposed pool. The proposal prompted a series of letters to the SEC in late August from concerned market makers, brokers, a trade group and lawyers who criticized Nasdaq's plan. Many called for changes or the outright rejection of the plan. 

Nasdaq said the purpose of the proposal is not to compensate all losses incurred on May 18 from Facebook's botched IPO, but to modify the $500,000 liability limit in order to make additional funds available for compensation in certain categories of loss outlined in its proposal.

For further details, go to [Reuters, 9/19/12].