* "Thousands" of Fidelity customers affected-source
* Knight damages claims exceed Nasdaq pool
* Facebook shares up slightly, Nasdaq stock falls
By Jessica Toonkel and John McCrank
May 24 Claims by four of Wall Street's main
market makers against Nasdaq over Facebook's
botched IPO are likely to exceed $100 million, as they and other
traders continue to deal with thousands of problems with
A technical glitch delayed the social networking company's
market debut by 30 minutes on Friday and many client orders were
delayed, giving some investors and traders significant losses as
the stock price dropped. The exchange operator is facing
lawsuits from investors and threats of legal action from
Four of the top market makers in the Facebook IPO -- Knight
Capital, Citadel Securities, UBS AG and Citi's
Automated Trading Desk -- collectively have probably lost
more than $100 million from problems arising from the deal, said
a senior executive at one of the firms.
Knight and Citadel are each claiming losses of $30 million
to $35 million, potentially overwhelming a $13 million fund the
exchange set up to deal with potential claims.
Nasdaq also has to contend with the outside prospect that it
could lose the Facebook listing entirely after having just
Facebook shares ended regular trading on Thursday up 3.2
percent at $33.03, about $5 short of their offering price.
Action on the stock, however, has essentially become secondary
to the fallout from the IPO -- its price, its size, its
execution and questions about selective disclosure of its
Regulators including the U.S. Securities and Exchange
Commission, the Financial Industry Regulatory Authority and
Massachusetts Secretary of the Commonwealth William Galvin are
now looking into how the IPO was handled. The U.S. Senate
Banking Committee is also reviewing the matter.
BROKERS UP IN ARMS
Advisers familiar with the situation said many investors are
now finding out, nearly a week after the fact, that their orders
were not executed at the prices they thought.
Fidelity, in a statement, said it was working with
regulators and market makers on its clients' issues "and we will
continue to do so until we are confident that Nasdaq has done
everything it can to mitigate the impact to our customers."
Morgan Stanley is also still tending to trade orders placed
by brokerage customers on Friday, two people familiar with the
situation said. Nasdaq has said all orders were returned by 1:50
p.m. EDT last Friday, but a Morgan Stanley Smith Barney source
said it did not get trade information in a "systemic, orderly
Late Thursday, the company held a call with its brokers and
told them adjustments would be made to thousands of trades so
that no limit orders would be filled at more than $43 a share
for stock from the IPO day, a person familiar with the call
While brokerages may have received confirmation of trades
made on Friday, many were still handling customer disputes over
what price they received on the trades, officials said.
The question is "who is going to eat the cost" of
compensating those investors, said Alan Haft, a financial
adviser with California-based Kings Point Capital LLC, which has
$200 million in assets.
One prominent plaintiffs lawyer said what happened with
Facebook was reminiscent of the dot-com bubble.
"This is just another spin on the same game of unfair
treatment of individual investors," said Stanley Bernstein of
Bernstein Liebhard. He chaired the plaintiffs' committee in an
IPO class-action suit challenging the role of investment banks
in more than 300 IPOs between 1998 and 2000. The litigation
ended in a $586 million settlement in favor of the plaintiffs.
MARKET MAKERS LOOM
The claims by market makers Knight and Citadel could end up
dwarfing some of the brokerage issues, though.
"They are certainly facing the specter of some significant
lawsuits if this pool is not enough," a source familiar with
Knight's situation said of the Nasdaq claims pool.
Citadel has sent its losses to Nasdaq for potential
compensation, a source familiar with the matter said. Citadel's
hedge fund was not affected.
The head of trading at Instinet said it still had no idea
when Nasdaq would respond to requests for accommodation --
essentially, compensation for the order problems -- or if those
requests would be honored.
"Were gonna be looking at a loss on our books" if Nasdaq
does not honor the requests, Mark Turner said. "We basically
made most of our clients whole because Nasdaq told us to go
through the process and file for accommodation. If Nasdaq does
not accommodate us we're going to end up taking a loss."
"I don't know that I want to put a dollar amount on that but
it's not nearly as significant as Knight's ($30-$35 million),"
Citadel and Knight, as market makers to the Nasdaq,
honor their clients' buy, sell and cancellation orders. The
orders are supposed to be processed by the exchange within
milliseconds, but there was a nearly two-hour delay in
processing Facebook orders at the Nasdaq.
During that time, market makers had no idea where their
orders stood. And in reality, the price clients bought or sold
at was sometimes different than the price they actually got.
For example, Facebook shares began trading with an opening
cross price - the first price at which those not in on the IPO
could buy or sell - of $42 per share. If an order to sell 10,000
shares at $42 went in at that time, but wasn't filled until
later in the day when shares were trading at around $39, a
market maker like Citadel or Knight would make up the difference
- in this case, at a cost of $30,000.
FEWER PROBLEMS ELSEWHERE
Several analysts who cover exchanges said Nasdaq's legal
liability should be limited, though. According to the analysts,
securities rules give Nasdaq wide discretion in determining
what, if any, compensation it should pay to customers who claim
that they suffered losses due to trading execution.
Under exchange rules, Nasdaq's liability regarding client
losses from certain trading issues is limited to $3 million a
month. Market makers will be arguing that Nasdaq was so grossly
negligent that its actions during the IPO opening override the
limits, said a source with knowledge of Knight's situation.
Other firms said they did not have similar problems to those
of Knight, raising questions about the scope of the losses.
"The problems were where people were trying to cancel
orders; we didn't have that," said Peter Boockvar, equity
strategist at Miller Tabak & Co in New York. "Because we didn't
have a problem doesn't mean there weren't problems."
E*Trade Financial Corp said its market making
operations realized losses of "well under a million dollars."
Charles Schwab Corp had a "small number" of the
"tens of thousands of clients" who traded Facebook whose issues
still have not been resolved, a spokesman said. "Each one
requires some analysis to resolve, which can be time consuming."
Shares of Nasdaq fell 1 cent to $21.80 on Thursday. As of
Thursday's close the stock was down 5.2 percent from its last
close before the Facebook debacle. Over the same period NYSE
Euronext is down just 0.1 percent.
The slide in the shares is adding to the pressure on Nasdaq
Chief Executive Robert Greifeld, who defended the exchange's
performance at its annual meeting last Tuesday.