[ by Howard Haykin ] Knight Capital, which criticized the Nasdaq OMX Group and threatened legal action over the Exchange's initial $40 million plan (to compensate member firms for losses they incurred during the Facebook IPO), has reversed course and announced its acceptance of the revised Nasdaq all-cash $62 million plan - subject to certain qualifications. Knight referred to Nasdaq's initial offer - $40 million worth of cash and rebate credits - as "inadequate."  The Exchange came back with the $62 million all-cash offer, which still falls far short of the estimated $500 million lost by member firms, though somehow Knight can see its way toward participating in this second and "definitive" response by Nasdaq to the Facebook IPO. It's generally agreed to all trading losses that member firms incurred were due principally, if not in their entirety, to Nasdaq's fumbles, bobbles and tech glitches throughout the end-of-the-week Facebook IPO. Knight Capital Group Reverses its Decision. Knight announced its acceptance of Nasdaq's latest $62 million plan in a letter to the SEC, dated 8/29/12.   The plan, which Nasdaq has called its "definitive word" on the Facebook debacle, presently is under review at the SEC.  Among other things, the Commission is considering if, and to what extent, a for-profit exchange - that also is a self-regulatory organization (i.e., an "SRO," akin to being a "deputy of the SEC") - can be held liable for its negligence and/or technical slip-ups.  Tasked with overseeing and matching hundreds of billions of dollars of securities transactions every day, exchanges are given significant latitude for errors - regardless of the amount.  All told, Nasdaq has around 300 member firms that trade on the exchange. By accepting the Nasdaq plan, Knight joins Citadel as the only two member firms with claimed losses to sign on with the Nasdaq plan.  Seven others - market makers, brokers, lawyers, individual investors - have called for the revised plan to be rejected.  In its letter to the SEC, Knight stated:  "Although we would have preferred that the accommodation pool cover all losses sustained by Nasdaq members, we do support Nasdaq's proposal." Capped Liabilities of Exchanges. Liabilities at exchanges which have some regulatory duties are capped in most instances.  Nasdaq's cap is $3 million. However, because Nasdaq operates as a for-profit entity, there's a lot of debate about Nasdaq's conflicted interest.  Should Nasdaq or other for-profit exchanges "cloak" themselves in regulatory immunity on those occasions where its activities are tied to a profit motive - as with Nasdaq's relentless pursuit of Facebook's listing.  From all indications, Nasdaq appeared unprepared for the volume and volatility of order changes that accompanied this IPO - particularly since numerous institutional investors canceled their orders upon learning of analyst concerns with Facebook's business model and its ability to service and generate revenue from the burgeoning smart phone universe.  It appeared that all the canceled institutional orders were passed along to retail-based firms. Other factors - and there were many - appeared to factor into the complexity of the offering - and undoubtedly caused technical glitches and innumerable delays.

• One such factor was that the decision of underwriters to price the IPO at the high end of the opening price range - $38 a share, rather than at $34 a share.
• Secondly, the size of the offering - i.e., number of shares offered - was significantly increased to enable additional sales by inside investors.
• Third, just prior to the IPO pricing date, research analysts for the lead underwriters uncovered major concerns about the ability of the firm to service and generate revenues from the smart phone universe.  This information was shared with only a select few institutions - who, as noted above - canceled their purchase orders - and these additional shares then were dumped on offered to retail investors, thus creating further change orders.

These 3 factors, alone, put enormous pressure on secondary trading of the stock which, over the next several weeks, led to such a sell-off that the price of publicly traded Facebook shares lost more than 50% of their market value from the IPO price. Problems with this Eagerly Anticipated 5/18 IPO - Delayed from the Get-Go. The $16 billion IPO was initially delayed by 30 minutes due to a technical glitch at Nasdaq.  The exchange then made the decision to get the stock trading by using a secondary system that ended up leading to delays in many clients orders and confirmations, costing some investors and traders big losses as the stock price dropped after an initial gain. Some firms that took big losses, complained Nasdaq never acknowledged or confirmed the receipt of execution of their customer orders, leading them to re-enter those customer orders, which resulted in the firms taking twice the number of shares as they had customer orders for.  These holdings had to be sold into a declining market for FB shares.   UBS AG estimated its loss at more than $350 million, and Citigroup's Automated Trading Desk said it lost up to $35 million. Knight (which also lost around $35 million) and Citadel (which lost around $20 million) both urged the SEC to leave the discussion of liability limitations and regulatory immunity to another day. There was a lot of discussion about the fact that Nasdaq should have either postponed the IPO to the following week, or that trading of FB shares should not have been allowed to continue during the confusion that followed. Urged Rejection of 'Release Waiver'. In its 8/29/12 letter to the SEC, Knight urged the SEC to reject a portion of Nasdaq's plan requiring firms that sign on, to waive their right to sue the exchange, quite possibly before they would know learn much they will be reimbursed.  Knight said that would set "a harmful precedent," adding that:  "Setting forth those types of requirements in the context of a rule filing inappropriately mixes commercial issues with regulatory requirements." Knight further noted that, if the SEC disagrees and determines that some form of release is appropriate, it should only be sought after Nasdaq members are notified of the amount Nasdaq is willing to pay to each under the terms of the accommodation plan. Nasdaq also faces regulatory investigations into its systems and actions during the IPO.  It was reported, for instance, that Nasdaq CEO Griefeld could not be reached over a 5-hour period - when he was flying back to New York from the Facebook IPO celebration in California. For further details, go to:  [Reuters, 8/30/12].