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07-06-2012 02:31:00

4th UPDATE: Nasdaq Plan Gets Scathing Reaction from NYSE, Others

--NYSE: Nasdaq proposal 'wholly inconsistent with fair practice'

--Knight Capital: Nasdaq proposal 'simply unacceptable'

--Some consider Nasdaq move an opening gambit in drawn-out process

(Adds comments from Nasdaq CEO in the 11th through 13th paragraphs.)

By Brett Philbin

NYSE Euronext (NYX) and Knight Capital Group Inc. (KCG) sharply criticized Nasdaq OMX Group Inc.'s (NDAQ) proposed $40 million fund to compensate trading firms that lost money from botched trades during Facebook Inc.'s (FB) tumultuous market debut.

In a statement late Wednesday, NYSE Euronext said that, while it hasn't seen Nasdaq's full plan, the proposal "would be wholly inconsistent with fair practice and an undue burden on competition to allow Nasdaq to use pricing and other machinations as a guise for fairly compensating those impacted by the Facebook IPO issues."

Earlier Wednesday, Nasdaq disclosed the highly anticipated plan, saying it would pay $13.7 million in cash to member firms that suffered losses, including the $10.7 million profit that Nasdaq made from first-day trading in Facebook and the maximum $3 million allowed under its rules to make good for botched trades.

The rest of the payments--the basis of the NYSE's ire--would come from trading discounts, which Nasdaq said would cover the Facebook losses within six months "for the vast majority of firms."

In its statement, the NYSE said "such a tactic would potentially strongly incent customers to divert order flow to Nasdaq in order to receive compensation to which they are entitled, and allow Nasdaq to reap a benefit from market share gains they would not have otherwise received."

The NYSE said the plan would "establish a harmful precedent that could have far-reaching implications for the markets, investors and the public interest."

Technology glitches during Facebook's initial public offering on May 18 delayed the social-networking company's opening trade more than 30 minutes and left brokers with millions of unconfirmed trades.

Market makers, retail brokerages and trading firms had been awaiting word of a reimbursement process from Nasdaq for more than two weeks. Losses for wholesale-market makers--firms which execute orders for individual investors supplied by their brokerages--including Knight Capital, UBS AG (UBS, USBN.VX) and Citigroup Inc. (C), have been estimated at more than $100 million collectively, according to people familiar with situation.

In a statement, Knight Capital--which had said it may suffer losses of up to $35 million linked to its trading in Facebook--said: "Clearly, we are disappointed that Nasdaq's compensation fund does not come close to covering reported losses from broker-dealers like Knight who traded Facebook shares on behalf of average investors the day of the IPO, and who suffered losses as a result of Nasdaq's failures in connection with this IPO."

A Knight Capital spokeswoman said Nasdaq's "proposed solution to this problem is simply unacceptable. As previously stated, the company is evaluating all remedies available under law."

Nasdaq responded to the NYSE and Knight criticism, referring to remarks the exchange's Chief Executive Robert Greifeld made in an interview with CNBC earlier Wednesday.

Greifeld said then that "we had to see the orders that were trying to come into our cross, and we had to make compensation for those orders that were not properly executed in the cross. We could not take responsibility for trading decisions other firms made."

As for criticism about potentially taking market share through reduced trading costs, he said, "We cut fees and the people will get the reduced fees. They don't have to give us any more constant share. Our market share could be constant or decline and people will still get paid. It's just a misunderstanding of the fact there. We are offering this to our customers that transact with us every day. They do not have to give us one incremental share for them to earn this payment."

Online brokerages are having mixed success working to resolve trading issues tied to the Facebook IPO.

John Dominic, vice president of trading at online broker TradeKing, said his firm was able to handle order problems in "real time" with wholesale brokers like Knight Capital. He said he has put the matter behind him and that TradeKing has resolved 100% of disputed Facebook trades. The wholesalers adjusted prices and fulfilled cancellations, he said, "and that's why we were able to get the cleanup done early."

While TradeKing's trades were resolved, Fidelity Investments continues to work through disputed Facebook trades. "Based on the plan outlined by Nasdaq earlier today, we are working closely with market makers and others to clarify what additional resolution, if any, might be available for our customers," said spokesman Steve Austin.

Among other reactions to the Nasdaq plan, privately held retail brokerage Scottrade Inc. said it will "carefully review the details of the plan to understand how it may impact the firm and our clients and determine the appropriate course of action."

A person familiar with the matter at one bank involved in the Facebook IPO said that the proposal put forward by Nasdaq appeared to be more of an opening gambit than a final solution, and that it would likely evolve over time.

Because the matter involves institutions with long-standing relationships, "There will be back and forth," the person said. "The good news here is this ends up being a dispute between entities dealing with each other every day. It's not the proverbial Joe Sixpack against the Nasdaq...I'm sure the Street is working through this."

Regarding Nasdaq, the person added: "Them not doing everything they should do is not a bullet point they want everyone talking about for the next 20 years."

Representatives from Goldman Sachs (GS) and Wells Fargo & Co. (WFC) declined to comment.

Write to Brett Philbin at brett.philbin@dowjones.com

-Christian Berthelsen, Kaitlyn Kiernan, Ben Fox Rubin and Chris Dieterich contributed to this article.

(END) Dow Jones Newswires

June 06, 2012 20:31 ET (00:31 GMT)

Copyright (c) 2012 Dow Jones & Company, Inc.

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