SEC may force Nasdaq to upgrade systems after Facebook IPO debacle

The Securities and Exchange Commission (SEC) is considering taking action against Nasdaq’s performance during the much anticipated Facebook IPO last month by forcing the exchange to upgrade its trading systems.

The IPO was riddled with technical problems, which led to a delay of 30 minutes on share trades being processed. The problem stemmed from Nasdaq’s IPO Cross, a pre-IPO auction process that the exchange put in place in 2006 that allows traders to place orders and agree on an IPO price before the stock is officially launched, which couldn’t handle the trading demand.

This led to a number of brokerages suffering financial losses after losing out on half an hour of trading and not receiving up-to-date information, including UBS, which is said to have suffered losses of as much as $350 million (£225 million).

Nasdaq has already selected IBM to conduct a review of the current state of processes for designing, developing, testing, deploying and operating market systems. However, according to reports in the Wall Street Journal, citing sources familiar with the matter, the SEC may now order Nasdaq to revamp its processes for developing, changing, testing and implementing the computer code used in IPOs and other exchange functions.

This is the latest development in an on-going saga since the problems occurred on 18th May, which has also seen Nasdaq confirm that it will earmark $40 million in compensation, most of which will be made up of reduced trading costs for brokerages.

However, this was not well received by operating rival New York Stock Exchange (NYSE), which released a statement claiming that if the SEC was to approve Nasdaq’s plans this would result in unfair practice and equates to the industry subsidising the exchange’s mistakes.

“We believe it would be wholly inconsistent with fair practice and an undue burden on competition to allow Nasdaq to use pricing and other machination as a guise for fairly compensating those impacted by the Facebook IPO issues,” said NYSE.

Copyright © 2012 IDG Communications, Inc.

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