Facebook - the largest IPO, NASDAQ - the largest penalty
This is the largest penalty ever against an exchange. 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.
"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 S. Canellos, co-director of the SEC's Division of Enforcement.
The SEC's order also charges NASDAQ's affiliated third party broker-dealer NASDAQ Execution Services (NES) with failing to maintain sufficient net capital reserves on the day of the Facebook IPO as a result of NASDAQ's own Facebook trading through the unauthorized error account. ■