--Citadel urges approval of Nasdaq OMX plan to compensate
Facebook IPO losses
--Citadel traded $3.8 billion worth of Facebook stock May 18,
incurred losses
--Current Nasdaq OMX rules not designed for large-scale market
problems, says Citadel
(Updates with additional comments from Citadel letter, further
background.)
By Jacob Bunge
Citadel LLC urged U.S. regulators to approve a controversial
plan by Nasdaq OMX Group Inc. (NDAQ) to make good on some losses
sustained by trading firms in the stock market debut of Facebook
Inc. (FB).
The $62 million proposal, which Nasdaq OMX retooled last month
following outcry from brokers and rival exchanges, is "objective
and fair," according to a letter submitted Tuesday by Citadel to
the Securities and Exchange Commission.
Citadel, known for its hedge funds, ranks among the biggest
handlers of stock and options orders flowing out of retail
brokerage firms. Such wholesale market-makers, which trade on some
individual investors' orders and pass others on to rival firms or
exchanges, were among the hardest hit by the glitch-ridden debut of
Facebook shares May 18.
On an average day, Citadel estimates that it accounts for about
10% of all trading in U.S. listed stocks, and more than 20% of the
volume in domestic stock options.
Citadel lost $30 million to $35 million trading the newly minted
shares, according to persons with knowledge of the transactions.
Rival Knight Capital Group Inc. (KCG) disclosed that it lost $35.4
million, while banking group UBS AG (UBS) lost more than $350
million.
The Chicago-based firm's letter on the Nasdaq OMX compensation
plan represents Citadel's first public comments on the Facebook
IPO. A spokesman for Nasdaq OMX did not respond to a request for
comment.
In the letter, Citadel estimated that the firm bought and sold
more than $3.8 billion worth of Facebook shares in the process of
executing its customers' orders for the hotly anticipated stock,
and "incurred losses protecting retail investors from the problems
caused by Nasdaq."
Those problems, according to Citadel, were "unprecedented" and
current rules governing the exchange's liability for member firm
losses driven by exchange system problems were not designed to
address such large-scale market events. For that reason, according
to Citadel, regulators should approve Nasdaq OMX's new plan.
The parameters Nasdaq OMX set out for paying back $62 million in
losses--far from the total amount suffered by Wall Street
firms--are "reasonable," according to Citadel. Oversight of the
claims process by the Financial Industry Regulatory Authority is a
positive, the firm told regulators.
Not all Nasdaq members agreed. Vandham Securities Corp., a
broker-dealer and market maker, submitted a separate letter to the
SEC Tuesday urging regulators to block the current plan's ceiling
on making up losses and require Nasdaq OMX to reimburse its
customers "in full."
Should regulators approve Nasdaq OMX's plan, firms like Citadel
that suffered losses trading Facebook's shares on May 18 will face
a choice. They can agree to accept a portion of the $62 million
package, likely healing only a portion of their losses, and in
return waive any legal claims on Nasdaq OMX.
Knight, one of the most vocal critics of Nasdaq's mishandling of
the Facebook flotation, is expected to support the Nasdaq OMX plan,
according to a person familiar with the firm's strategy.
Other participants may pursue legal action against Nasdaq OMX
instead of accepting a slice of the payout. UBS, which accused
Nasdaq OMX of "gross mishandling" of the Facebook debut, has said
it will seek full compensation for its hundreds of millions of
dollars in losses through legal channels.
Exchanges hold strong defenses against lawsuits aimed at
recouping losses driven by faulty systems, their legal liability
limited by their status as regulatory entities.
Citadel in its letter urged regulators to postpone any debate
around the extent exchanges, now largely for-profit enterprises,
should retain these legal protections, so that such discussions
don't delay compensation flowing back to injured firms.
-Write to Jacob Bunge at jacob.bunge@dowjones.com
Subscribe to WSJ: http://online.wsj.com?mod=djnwires