The Securities and Exchange Commission today charged NASDAQ with securities laws violations resulting from its poor systems and decision-making during the initial public offering (IPO) and secondary market trading of Facebook shares. NASDAQ has agreed to settle the SEC's charges by paying a $10 million penalty - the largest ever against an exchange.
Exchanges have an obligation to ensure that their systems, processes, and contingency planning are robust and adequate to manage an IPO without disruption to the market. According to the SEC's order instituting settled administrative proceedings, despite widespread anticipation that the Facebook IPO would be among the largest in history with huge numbers of investors participating, a design limitation in NASDAQ's system to match IPO buy and sell orders caused disruptions to the Facebook IPO. NASDAQ then made a series of ill-fated decisions that led to the rules violations.According to the SEC's order, several members of NASDAQ's senior leadership team convened a "Code Blue" conference call and decided not to delay the start of secondary market trading in Facebook with the expectation that they had fixed the system limitation by removing a few lines of computer code. However, they did not understand the root cause of the problem. NASDAQ's decision to initiate trading before fully understanding the problem caused violations of several rules, including NASDAQ's fundamental rule governing the price/time priority for executing trade orders. The problem caused more than 30,000 Facebook orders to remain stuck in NASDAQ's system for more than two hours when they should have been promptly executed or cancelled. . .
Bill Singer's CommentAll well and fine but this is more than a bit of finger pointing by the SEC and not much, if any, recognition by the federal regulator that it too has failed in this matter. At the end of the day, we have the SEC essentially reduced to pushing a very large broom behind the elephants in the circus parade -- and collecting a fat check as some form of penance by NASDAQ. Frankly, neither role impresses me as an effective way to regulate the securities markets.The SEC must implement a far more rigorous role for itself in terms of confirming that the electronic systems underpinning the markets are up to snuff and that those operating the markets have installed "kill switches" for both individual securities as well as the entire venue. Further, this mission-critical aspect of regulation cannot be discharged by asking for a signature of some C-Suite manager on an annual attestation. The SEC needs to have staff on premises, participating in regular systems testing.Additionally, we must demand far more in the way of redundancy when the market technology stutters or crashes. What we had with the NASDAQ Facebook IPO debacle were folks sitting around at a Code Blue trying to figure out what happened, what's happening, and what's going to happen; and all the while the proverbial "bad" is transforming into the proverbial "worse." Y'all can't be cogitatin' while the market is crashing down around you.The SEC's settlement is, at best (or worst?) a post-mortem. That's not gonna do it. We need more in the way of a vaccine for prevention.Next up, let's see how Knight Capital fares with its much rumored SEC settlement over the August 1,2012 market disruption its technology caused.