new York 08 01, 2012, 00:50 IST
Facebook's
But UBS did not fully explain why its losses were ten times worse than other market makers, raising questions about how much liability Nasdaq could actually face.
Meanwhile, Facebook shares fell to a new all-time low Tuesday, touching $21.61 in afternoon trading. At that level they are down 52 percent from their first-day high.
UBS's 349 million Swiss franc loss dwarfs the $62 million all-cash plan Nasdaq set up to compensate customers who lost money because of the exchange's technical problems with the offering.
Exchange executives said last week they were confident that the plan would satisfy those affected, though they declined to comment Tuesday on UBS's threats, which were an effective rejection of the compensation plan.
Like UBS, Citigroup's
Representatives for Citi, Citadel and Knight had no comment. A representative from UBS said the firm has not filed any action against Nasdaq so far, and that it would not do so "frivolously."
UBS handles most of the order flow from Charles Schwab Corp
But that alone does not account for the massive loss. UBS said that as a result of "multiple operational failures by NASDAQ, UBS's pre-market orders were not confirmed for several hours" rather than in the usual milliseconds. That triggered its internal systems to re-enter orders multiple times, it said.
When the confirmations finally came through, UBS and other market makers were left owning large amounts of unwanted Facebook stock, which led to losses as the stock plunged.
It also is unclear what role UBS's own trading system might have played in the losses or what action the company will take to recoup the $356 million.
"There may be limitations on recoveries UBS may receive," said former SEC lawyer Ron Geffner, a partner at Sadis & Goldberg LLC in New York. "That said, it is such a black eye for the Nasdaq that they're highly motivated in resolving all litigation before it spins further out of control."
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WHAT WENT WRONG
At the heart of the problems was, by all accounts, a communication issue.
For nearly 20 minutes on the morning Facebook opened, a phone call that was supposed to keep traders informed was silent, with no information coming through. But on the line with the order desk at Nasdaq, market makers were being told to keep sending orders. Those should have been processed when Facebook debuted.
But once shares started trading, confirmations on many of those orders, usually delivered in milliseconds, never came. Market makers later learned some orders were lost, and others were not processed at the open, but were filled hours later.
Market participants calling the exchange to find out what was going on said they encountered wait times of up to an hour -- if their calls were answered at all.
That caused confusion about how many shares a market maker actually held, and led to some of the re-ordering that caused UBS's losses.
When the order confirmations did not come back to UBS from Nasdaq quickly, the systems designed to ensure customers get the best execution and proper trade execution -- something required by regulations governing firms like UBS -- were forced to scan the firm's limit order books repeatedly in order to comply with regulations, said two sources with knowledge of the situation.
Overwhelmed by the order message backup, UBS's systems slowed even more, as did the systems at some other market makers, the sources said.
Adding to the problem, after Facebook began trading, investors watched as the stock's price dropped below its initial trading price. Some wanted to cancel their orders completely or cancel and re-order at a better price.
In many cases the original order to buy the shares still had not been processed by Nasdaq, and appeared to have never gone through at all. At UBS, that sent its system into something akin to a repeat mode.
"Because there still was no confirmation, UBS's system automatically re-sent the orders," said the source, who has knowledge of UBS's systems.
Several market participants said they tried in vain to get Nasdaq to halt trading on Facebook to fix the problem and called the U.S. Securities and Exchange Commission to make sure it knew the gravity of the situation.
Market makers said it was tough to comment without knowledge of UBS's systems and procedures. Most agreed, nonetheless, that an order is deemed live until a cancellation or some sort of acknowledgement is received, or when it is executed or rejected. Sending and resending an order that has not been acknowledged is not a standard procedure.
Regulators are now investigating the matter.
LIABILITIES CAPPED?
Liabilities at U.S. exchanges are capped in most instances. Nasdaq's cap is $3 million and the compensation plan filed with the U.S. Securities and Exchange Commission is meant to increase that in this specific instance.
But a legal source told Reuters a firm could sue in the case of gross negligence.
The question remains, though, whether Nasdaq's actions were regulatory -- in which case it has some immunity -- or merely a failure to provide professional services.
"Nasdaq is going to want to say the delays, the screwups on the morning, were because of regulatory decisions to delay trading, disrupt trading," John Coffee, a securities law professor at Columbia Law School, said in an interview.
"If they can convince the fact-finder these were regulatory decisions, then they cannot be held liable. To the extent that Nasdaq makes decisions in a regulatory capacity, it has immunity. UBS is going to say, 'You did not perform the service a professional is supposed to perform,' and that's malpractice."
