The No. 2 U.S. stock exchange finally pays the price for the Facebook IPO meltdown.
The Nasdaq OMX stock exchange has agreed to pay a $10 million fine for its mishandling of the Facebook initial public offering after the Securities and Exchange Commission officially charged it today with securities laws violations stemming from the social media giant’s IPO last spring.
The penalty amounts to the largest fine ever imposed against an exchange, the SEC said in a press release. Regulators argued that exchanges have an obligation to ensure that their systems and processes can manage an IPO adequately, without causing any disruption to the market—something Nasdaq didn’t do.
“Despite widespread anticipation that the Facebook IPO would be among the largest in history with huge numbers of investors participating, a design limitation in Nasdaq’s system to match IPO buy and sell orders caused disruptions to the Facebook IPO,” regulators said in the SEC-issued release. “Nasdaq then made a series of ill-fated decisions that led to the rules violations.”
Specifically, Nasdaq’s decision to proceed in allowing Facebook shares to change hands in secondary-market trading despite the exchange’s lack of full understanding of a system limitation caused more than 30,000 Facebook orders to remain stuck in Nasdaq’s system, preventing their proper execution, the SEC said.
Facebook, which went public on May 18, 2012, saw its share price tank right off the bat, with investors unclear on whether their trades had gone through.
Opening on a high note of $42 a share on May 18, the stock closed at $38.23 in its first full day as a public company, and went on to decline in value for several sessions after that, closing at a low of $17.73 by September.
Shares of the $57 billion company are bleeding about 2 percent in value today, trading around $23.60 a share.
“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,” SEC’s Division of Enforcement’s co-director George Canellos said in the release.
“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,” added Daniel Hawke, chief of SEC Enforcement Division’s Market Abuse Unit.
In its own statement also released today, Nasdaq said that its systems had worked well before, but the "challenges" the exchange faced during Facebook's IPO were "unprecendented."
Since then, Nasdaq has added safeguards and worked to improve its trading technology, the statement said, and some 77 IPOs have already followed Facebook's initial public offering uneventfully.
"We will continue to devote significant resources to improve the safety, soundness, and reliability of our markets," Nasdaq OMX Group's Chief Executive Officer Robert Greifeld said in the statement. "We recognize that the cornerstone of a market is investor confidence."