Nasdaq to Pay $10 Million Fine Over Facebook I.P.O.

Nasdaq’s parent company will pay the largest fine ever levied against an exchange for “poor systems and decision making” both before and after the bungled Facebook initial public offering.

The $10 million fine announced by the Securities and Exchange Commission on Wednesday helps the market operator put behind it an episode that hurt its reputation and damaged investor confidence in the stock market.
But the investigation of the incident by the S.E.C. provides new and embarrassing details about the repeated blunders Nasdaq OMX Group executives made on the day of the I.P.O., May 18, 2012. The S.E.C. also found that Nasdaq had violated its rules on two occasions unrelated to Facebook in October 2011 and August 2012.

The head of the S.E.C.’s market abuse unit, Daniel Hawke, said in a statement that there has been too much of a tendency to write off incidents like the Facebook I.P.O. as “technical ‘glitches.’”

“It’s the design of the systems and the response of exchange officials that cause us the most concern,” Mr. Hawke said.

Robert Greifeld, the chief executive of Nasdaq, wrote in an open letter on Wednesday that the company had put new safeguards in place. But he also defended the company’s overall performance.

“While we prepared extensively for the Facebook initial public offering, including thorough tests of our systems with member firms, the challenges we encountered that day were unprecedented,” Mr. Greifeld wrote.

The mishandled Facebook I.P.O. was among a series of breakdowns that rocked the United States stock markets last year and led to questions about the safety and soundness of an increasingly complex and computer-driven system.

In addition to the $10 million fine, Nasdaq has already agreed to pay $62 million to the brokers who lost money because their Facebook orders were improperly handled. Even that has not been enough to placate the firm that was hurt the most, UBS, which claims it lost $356 million because of Nasdaq’s errors. UBS has said it plans to seek more money from Nasdaq through arbitration.

The S.E.C.’s findings could aggravate some of the remaining tensions over Nasdaq’s handling of the I.P.O. because it reveals numerous, and previously unknown ways that the exchange executives fumbled the incident.

The problems began before the day of the I.P.O. Nasdaq did tests of its computer programs, but only on 40,000 orders, according to the S.E.C.’s order. When it was time to begin the trading, at 11 a.m. on May 18, the system was overwhelmed by 496,000 orders.

The deluge of orders sent Nasdaq’s computer programs into a continuous loop that made it impossible to establish a correct opening price for Facebook stock. Nasdaq executives were immediately aware of the problems, and summoned a “Code Blue” conference call, but they decided to proceed with the opening after making a few temporary fixes to the computer code and switching to an untested backup system, the S.E.C. found.

Once Facebook started trading at $42, numerous brokers contacted Nasdaq to complain that they still did not know how many shares of Facebook they had actually purchased. Just after noon, the C.E.O. of one broker wrote an e-mail to Mr. Greifeld complaining that “we are all trading blind.”

“Should you stop trading for some period of time so we can all catch up and actually understand our exposure?” the C.E.O. wrote, according to the S.E.C. order.

At the time, Mr. Greifeld was headed back to New York from Facebook’s California headquarters, largely out of touch with his team. But Mr. Greifeld’s deputies decided not to stop trading. It was only at 1:50 p.m. that Nasdaq executives realized that they had failed to execute tens of thousands of orders that had been sent in. At that point, they caused more problems by selling many of these shares into the market, leading to a sharp drop in Facebook’s share price.

In addition to the problems with Facebook I.P.O., the S.E.C. reported that the technology problems hit the stock of game-maker Zynga on the day of the Facebook I.P.O., causing big swings in the price of Zynga shares.

Programming errors were also the cause of the violations in October 2011 and August 2012, when Nasdaq mistakenly executed some customer orders below the publicly listed price.

Nasdaq’s problems took some of the blame for the early difficulty faced by Facebook’s stock, but the social networking site’s troubles seem to have outlasted the chaos of the I.P.O. The company’s stock has never risen above its opening price of $42.05 and was trading down 2.2 percent on Wednesday at $23.58.