In an attempt to compensate for the failure of Facebook Inc.’s (FB) initial public offering (“IPO”), Nasdaq OMX Group Inc (NDAQ) promised to pay $40 million to the trading firms that incurred losses due to the technical hitch occurred on the IPO day. It agreed to make a cash payment of $13.7 million. The balance was to be remitted by subsidizing the trading fees of the concerned investors for the next six months.
Nasdaq would compensate for the losses that were incurred under the circumstances when orders to sell at $42 or less didn't execute; orders to sell at $42 or less went through at a lower price, and buy orders at $42 weren't immediately confirmed.
However, Nasdaq’s decision to recompense awaits the approval of regulatory bodies including the Securities and Exchange Commission (:SEC). This is because exchanges as big as Nasdaq are prohibited from paying a compensation toward trading losses exceeding $3 million in a month.
Moreover, the company’s decision to reduce the trading fees for the next few months have been highly criticized by its arch rival NYSE Euronext (NYX), which believes that such initiatives promote unhealthy competition among the market players. Also, it is concerned that investors would be more interested to trade on Nasdaq for receiving refunds and getting the advantage of discounted trading fees.
Following this incident, we expect Nasdaq to be more thorough in dealing with high-profile IPOs such as Facebook by rectifying such technical snags in advance. Along with the outflow of huge money as compensation, these incidents have the potential to put its reputation at stake. The reimbursement might be attractive to investors in the near term, but it may have an unfavorable impact on the company’s reputation going forward.
Nasdaq currently retains a Zacks #5 Rank, which translates into a short-term Strong Sell rating.
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