The Securities and Exchange Commission today charged NASDAQ with securities laws violations that it blamed on poor systems and poor decisions during the initial public offering (IPO) of Facebook stock last May.
NASDAQ has agreed to pay a $10 million fine, the largest-ever paid by an exchange, according to the SEC.
“Too often in today’s markets, systems disruptions are written off as mere technical ‘glitches’ when it’s the design of the systems and the response of exchange officials that cause us the most concern,” said Daniel Hawke, head of the SEC Enforcement Division’s Market Abuse Unit.
According to the SEC’s report, a design limitation in NASDAQ’s system that matches IPO buy and sell orders disrupted the Facebook stock offering. NASDAQ’s senior leadership team discussed the issue and decided not to delay the start of secondary market trading in Facebook shares, mistakenly believing that they had fixed the problem by removing a few lines of computer code.
The decision to start trading led to several rules being violated, in particular one that limits how long trade orders can sit before being processed. During the IPO, more than 30,000 Facebook orders placed between 11:11 and 11:30 a.m. on the day of the IPO remained “stuck in NASDAQ’s system for more than two hours when they should have been promptly executed or cancelled,” the SEC said. Before these orders were stuck, officials saw but failed to correct a problem with their system.
NASDAQ also used an unauthorized account to short Facebook stock, earning itself a profit of $10.8 million — an amount larger than the fine it agreed today to pay the SEC.