Nasdaq fined $10 million over Facebook IPO

The Securities and Exchange Commission today charged Nasdaq with securities laws violations resulting from poor systems and decision-making during Facebook’s IPO, and secondary market trading of those shares.

Nasdaq agreed to settle by paying a $10 million fine, the largest ever levied on any exchange.

Exchanges are responsible for running the smooth management of an IPO without creating disruptions to the market. As such, they’re expected to use adequate systems, processes and plan properly for contingencies, the SEC order said.

While the Facebook IPO was widely anticipated to be one of the largest ever and was expected to draw a huge number of investors, a design limitation in NASDAQ’s system to match IPO buy and sell orders caused disruptions. A series of ill-fated decisions then led to the rules violations.

Read: Shareholders sue Facebook

The SEC says Nasdaq’s senior leadership team participated in a “Code Blue” conference call and attempted to troubleshoot the system without discovering the root-cause of the system limitation. By deciding not to delay trading before fully understand the problem, the team violated several rules, including an exchange rule governing the price/time priority for executing trade orders.

The limitation caused 30,000 Facebook orders to remain in Nasdaq’s system for two hours when they should have been rapidly executed or cancelled.

“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,” said George Canellos, SEC’s co-Director of enforcement.

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The matching of buy and sell orders in an IPO is referred to as the cross. The SEC’s order says the systems problems encountered during the Facebook IPO on May 18, 2012, caused the cross to fall 19 minutes behind the orders received by Nasdaq, whose IPO cross application calculated the price and volume of the cross based on the orders and cancellations received up until 11:11 a.m.

This time discrepancy caused more than 38,000 marketable Facebook orders placed between 11:11 a.m. and 11:30:09 a.m. to not be included in the cross. Approximately 8,000 of those orders were entered into the market at 11:30 a.m. when continuous trading commenced, and the remaining 30,000 were so-called “stuck” orders.

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