Nasdaq OMX faces short-term costs from its botched handling of Facebook shares on their first day of trading but the longer term repercussions could be more expensive as it struggles to restore its image.
Initially, the exchange said it plans to set aside $13 million to resolve bad trades, and even if all of that was used, the cost would be minimal compared with the $387 million in net income it reported last year.
The bigger hit to Nasdaq's business is likely to come from the damage done to its reputation by the stumble. Nasdaq failed on Friday to return order confirmations to some investors for hours and delayed the start of trading by 30 minutes because of problems with its systems.
The problems compounded investor anxiety about Facebook and whether retail investors would get shares, helping to turn what investors hoped would be a double-digit first-day pop into a fizzle with a rise of less than 1%. Some brokers reported Monday that they still had not received order confirmations.
IPOs contribute to Nasdaq's US listings business, which earned $173 million in revenue out of a total $1.69 billion last year, and could be the biggest casualty in the months ahead.
Nasdaq may have trouble competing for future "ultra-large" IPOs, said former Nasdaq Vice Chairman David Weild, who is an adviser at Grant Thornton LLP.
"This will be brought up in those discussions, certainly," he said.
Waiting to capitalise on the snafu is Nasdaq's arch rival, the New York Stock Exchange, owned by NYSE Euronext. The two have been locked in an intense battle for new listings in recent years, and winning the Facebook IPO, the first US company to go public with a valuation greater than $100 billion, had been seen as a major coup for Nasdaq.
Now, Nasdaq faces a Securities and Exchange Commission investigation of issues behind the botched IPO.
Black eye
Nasdaq still has some advantages on its side. It is one of only two major players in the US listing business and because both are unique in terms of offerings, brands, fees and listing standards, some said Nasdaq's IPO pipeline should stay robust.
"Of course it's a black eye and of course it's embarrassing and of course it's a negative, but I don't think anything is going to change in terms of their market share in the listings business," said Macquarie Securities analyst Ed Ditmire.
Indeed, shares of Nasdaq rose 3.6% Monday to close at $22.78, outpacing the Nasdaq 100 index, even as shares of Facebook tumbled 11% to close at $34.03, well below the $38 IPO price. Nasdaq shares tumbled more than 4% on Friday.
And Nasdaq's liabilities for customer losses are capped at $3 million per month because of legal and regulatory protections. Every Nasdaq member signs a membership agreement signing off on that cap.
But the problems from Facebook's debut prompted Nasdaq to say on Monday that it was changing its IPO procedures, and would use for IPOs the software it currently runs for its regular opening and closing numbers, rather than the software in place during Facebook's market launch.
And its failure to respond to media questions during Friday's crisis, or to reveal much about what went wrong afterwards, only heightened concern that the exchange is not as transparent as it needs to be.
Nasdaq Chief Executive Robert Greifeld waited until Sunday to tell reporters that a malfunction in Nasdaq's trading system design led to the delay in Facebook's trading launch and confirmations of buy and sell orders.
Nasdaq said it had all orders, executed or not, returned to member firms by 1:50 pm Eastern Daylight Time (1750 GMT) on Friday.
But on Monday, some firms were still trying to sort out the pieces.
"Although some executions were reported back from market makers over the weekend, we are still waiting for final responses on other orders," a spokesman for Fidelity Investments told Reuters in an email.
Some clients at Charles Schwab Corp were also awaiting confirmation on orders, a spokesman said, and an adviser at Morgan Stanley Smith Barney said that firm has a large number of market orders entered on Friday that still have not been reconciled.
Losses & liabilities
"This was arguably the worst performance by an exchange on an IPO ever," Thomas Joyce, Chief Executive of Knight Capital Group, said on Monday on CNBC. (Link to the CNBC interview on Reuters Insider: http://r.reuters.com/qev38s)
Joyce said that his firm, like dozens of others, lost money in the Facebook IPO process because they did not know which trades were going through for two hours on Friday.
The Financial Industry Regulatory Authority (FINRA) has been tasked with reviewing requests from investors whose orders were not filled at the opening price of $42 or less, Nasdaq said on Monday.
FINRA officials declined comment, other than to say Nasdaq was overseeing all announcements on the topic.
FINRA's enforcement reach extends only to brokerages, but conclusions about Nasdaq's possible role in Friday's trading problems could help investors who may have lost money due to the delayed start of Facebook's IPO, said George Brunelle, a New York-based lawyer who advises brokerages.
Nasdaq would be immune to suit only in the context of its self-regulatory functions. Friday's incident likely stemmed from "Nasdaq as an order processing facility," Brunelle said. "There have to be a lot of red faces."
