[ by Howard Haykin ]

SEC Decides to "Institute Proceedings" and Seek  Additional Public Comments.

Nasdaq OMX's $62 million plan offered to member trading firms that reportedly lost, all told, upwards of $500 million, is getting closer scrutiny by a combined group of U.S. regulators.   The SEC said it was instituting proceedings to more closely review the plan in light of the "legal and policy issues raised" by other market players.  The following was included in an SEC notice posted online on Monday:

"The Commission believes that questions are raised as to whether Nasdaq's accommodation proposal... would promote just and equitable principles of trade, protect investors and the public interest, and not be designed to permit unfair discrimination between customers, issuers, brokers, or dealers."

A Nasdaq spokesman declined to comment ...  on the SEC's decision to extend the timeframe for reviewing the proposal.  However, on the company's earnings call earlier this month, Nasdaq CEO Bob Greifeld said he anticipated such a move by the SEC. 

Market-makers like Knight Capital Group Inc, UBS AG, Citigroup Inc, and others, ...  say they collectively lost around $500 million on 5/18/12 when Facebook first debuted on public markets. A technology issue delayed the IPO for 30 minutes at the outset, and in the interim, many orders were not included in the opening cross, that led to further delays in many clients' orders being put through and hours-long waits for confirmations.  Some orders were lost all together, while others were entered repeatedly when market-makers did not receive the electronic confirmations they expected. Those usually arrive within seconds.
 

Nasdaq has since disclosed that the SEC's enforcement division is investigating the series of events leading up to the $16 billion IPO.   Nasdaq had originally drafted a $40 million compensation plan for brokers who lost money, but later raised it to $62 million amid criticism that the amount was too low.  Since then, some market-makers and brokers have said they would back the amended proposal. But other market participants have continued to balk at the sum being offered.
 

New Dodd-Frank Procedural Change - 45 Day SEC Review Period.    The SEC's decision to "institute proceedings" to determine whether or not to approve or disapprove Nasdaq's proposal is a new, procedural change created by the 2010 Dodd-Frank financial reform law.  The law aimed at streamlining the process for the commission to review rule changes filed by exchanges, which act as SROs, typically is used when a law is novel, complicated or somewhat more controversial.  The law requires the SEC to either approve, disapprove or institute such proceedings for proposed rule changes no more than 45 days after an exchange submits it for consideration.  If the SEC does not act within the 45 days, the rule automatically gets approved. In this case, the deadline for the SEC to act was 10/30/12. 

The SEC said that 2 concerns stand out among the main complaints it's received from commenters:

• concerns about the "limited categories" of claims eligible for compensation, Nasdaq's method for determining losses.
• requirement for member firms to waive all claims against the exchange operator for their losses.
   

For further details, go to:   [ Reuters, 10/31/12].