* Knight says lost $30-$35 mln on botched Nasdaq trading
* Seeks compensation from Nasdaq
* Nasdaq shares down 2.3 pct in after-hours trade
By John McCrank and Ashutosh Pandey
May 23 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
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
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
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.
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.