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Facebook market makers' losses may hit $100m

New York, May 25, 2012

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 customer orders.

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 brokers.

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 obtained it.

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 financial prospects.

Regulators including the US 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 US Senate Banking Committee is also reviewing the matter.

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 way."

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 said.

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.  - Reuters




Tags: IPO | Nasdaq | facebook | market makers |

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