Nasdaq OMX Group (NASDAQ:NDAQ), which operates the tech-heavy Nasdaq stock exchange, has agreed to pay a $10 million fine for breaching laws in relation to Facebook's (NASDAQ:FB) error-laden initial public offering and secondary market trading last May.
It's the largest penalty that the Securities and Exchange Commission has ever slapped against an exchange. The charges stem from what SEC considered to be Nasdaq's "poor systems and decision-making" that led to millions of dollars worth of misplaced trades.
Fingers have pointed in several directions for the IPO mishap, including at Facebook, accused of alerting underwriters to information undisclosed to the public. But the SEC violations zone in on technical delays and order glitches, including more than 30,000 share orders that became stuck in Nasdaq's system for more than two hours and Nasdaq's actions in the aftermath.
“This action against NASDAQ tells the tale of how poorly designed systems and hasty decision-making not only disrupted one of the largest IPOs in history, but produced serious and pervasive violations of fundamental rules governing our markets,” said George Canellos, co-director of the SEC’s Division of Enforcement.
Despite knowledge that Facebook's debut as a public company would be the largest in Internet history, Nasdaq failed to address a "design limitation" in its system, according to the SEC's statement. "NASDAQ then made a series of ill-fated decisions that led to the rules violations," the SEC stated.
The design flaws caused a 19-minute delay in the matching of buy and sell orders, known as the cross. The SEC said Nasdaq officials failed to fix the problem even after it noticed discrepancies with the cross.
Nasdaq went ahead with secondary market trading, believing it had corrected the flaw by revising some lines of computer code. But the SEC says Nasdaq failed to address the root of the problem: the design.
Additionally, Nasdaq violated rules by using an error account to assume a short position of more than three million shares in Facebook and collecting a $10.8 million profit by covering the short position.
The SEC also charged Nasdaq with other regulatory breaches last August and October unrelated to the Facebook IPO.