UPDATE 3-Knight Capital hit by Facebook loss, wants Nasdaq to pay

Wed May 23, 2012 9:37pm EDT

* Knight says lost $30-$35 mln on botched Nasdaq trading debut

* Seeks compensation from Nasdaq

* Nasdaq shares down 2.3 pct in after-hours trade

By John McCrank and Ashutosh Pandey

May 23 (Reuters) - Electronic trader Knight Capital Group said it suffered a pre-tax loss of $30 million to $35 million on the botched Nasdaq trading debut of social media giant Facebook and is demanding the exchange compensate that amount.

The loss, which Knight said will be recorded in its second-quarter results, was due to numerous problems related to the Facebook initial public offering.

A technical glitch delayed Facebook's market debut by half an hour on Friday and many client orders were delayed subsequently, costing some investors and traders big losses as the stock price dropped after an initial gain.

The Knight announcement may be a sign of things to come as other traders and investors tally up any losses from the trading problems. Already, Nasdaq is facing a lawsuit - seeking class-action status - from an investor claiming the exchange was negligent in handling Facebook orders.

Knight said in a regulatory filing on Wednesday it is considering all legal remedies available.

While regulations limit Nasdaq's liability regarding client losses from certain trading issues to $3 million a month, firms will be looking to prove that the actions of the exchange during the IPO opening fall outside limits, said a source with knowledge of Knight's situation.

Nasdaq has asked the Financial Industry Regulatory Authority to review requests from investors whose orders were not filled at the opening price of $42 or less.

Nasdaq also faces a Securities and Exchange Commission investigation of issues behind the botched IPO.

POOL FOR BAD TRADES

Nasdaq has said it hopes to set aside a pool of $13 million to settle bad trades, but that pales in comparison to the amount Knight is seeking.

"They are certainly facing the specter of some significant lawsuits if this pool is not enough," the source said.

Nasdaq's shares were down 2.3 percent at $21.81 in after-hours trading.

Knight's losses came from a combination of client accommodations and from the firm's own trading losses during a period of around two hours after Facebook shares began trading in which Nasdaq was unable to send order executions or cancellations to clients.

Knight is a leading market maker in U.S. equities, and in that role, had to compensate its clients for losses that occurred when orders originally placed at $42 a Facebook share, for example, were not filled until the price had fallen below that level.

Knight Capital shares were down 1.3 percent at $12.28 in extended trading. They closed at $12.44 on Wednesday on the New York Stock Exchange.

HIGH-PROFILE SLIP-UPS

The Facebook IPO, one of the most anticipated in recent memory, and the largest ever in terms of volume of shares traded on the opening day, was just the latest blow to investor confidence in the largely computer-driven equity markets.

Investors have been on edge since the "flash crash" in May 2010 when $1 trillion in shareholder equity was temporarily wiped out in a matter of minutes.

Other recent high profile slip-ups in the equity markets include the botched IPO of BATS Global Markets in March, when a series of unforeseen glitches hit the company's market debut on its own exchange and caused the No.3 U.S. exchange to take the extremely rare step of withdrawing its IPO.

The debacle also led to a fouled trade in shares of Apple Inc, the world's most valuable company, and caused a temporary halt in the stock.

In April, when data-mining software maker Splunk went public on Nasdaq, it was very well-received and its shares soared, tripping a circuit breaker that temporarily halted the stock. But its shares continued trading on NYSE Arca during the halt, and those trades had to be canceled.

The websites of Nasdaq and BATS were attacked by hackers in February, causing disruptions to the sites. Trading on the exchanges was not affected as the websites are separate from the exchange's trading systems.

Hackers also infiltrated Nasdaq's computer systems in 2010 and installed malicious software that allowed them to spy on the directors of publicly held companies.

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