Is Nasdaq’s $40 Million Mea Culpa Enough To Undo The Damage?

Nasdaq OMX (NASDAQ:NDAQ) has unveiled a $40 million compensation fund to assuage brokers who lost money due to the exchange’s mishandling of the Facebook (NASDAQ:FB) initial public offering. ^[1] Software malfunctions, glitches and delays during the IPO cost brokerages over $100 million in losses and prompted several lawsuits against Nasdaq. (See Facebook’s Relationship Status With Nasdaq: It’s Complicated)

Although Nasdaq Chief Executive Robert Greifeld has offered an apology to investors, describing the situation as a low point for the exchange, the compensation plan has received criticism from the trading community as well as competitors NYSE Euronext (NYSE:NYX). The exchange believes that the package would set a dangerous precedent and would lure customers to trade on NASDAQ, in order to get refunds. ^[2]

See our full analysis of Nasdaq OMX

Assessing the Damage

The compensation plan, which will require approval from the Securities and Exchange Commission (SEC), will offer $13.7 million in cash and the rest in trading discounts to investors who were disadvantaged by the technical problems faced on the day of the IPO. Sell orders that were priced at below $42 and were either sold at a lower price or failed to execute will be accommodated in the plan along with buy orders priced at $42 which were not confirmed immediately. This announcement has left many firms unhappy as the compensation offered pales in comparison with the losses suffered.

More importantly the damage to Nasdaq’s brand and role as a technologically superior platform for traders suffered from this episode and several firms looking to list have now held off based on market conditions, which directly impacts Nasdaq’s bottom line. Corsair Component, Tria BeautyOnline, Palo Alto Networks and ServiceNow are among some of the highly anticipated IPOs that have decided to reconsider their positions in the aftermath of the Facebook saga. ^[3]

However, we believe that this worrying trend will soon subside and listings will pick up once again, after the dust surrounding the incident settles down. Nasdaq’s reputation in the U.S. as the premier destination for technology listings will help it attract companies as new businesses in the U.S. continues to grow. U.S. listings account for 37% of our price estimate for Nasdaq

Nasdaq also announced that IBM (NYSE:IBM) would conduct a thorough review of its processes for operating market systems, to ensure that such a malfunction does not occur again.

We have a price estimate of $26 on Nasdaq OMX’s stock, about 20% above the current market price

Understand How a Company’s Products Impact its Stock Price at Trefis

1. NASDAQ OMX and NASDAQ Stock Market Boards Announce Program for Voluntary Accommodations Related to Facebook IPO Cross, June 6^th, 2012 [↩]
2. NYSE Criticizes Nasdaq’s Facebook Compensation Plan, Bloomberg, June 6^th, 2012 [↩]
3. Post-Facebook IPO market frozen, CNNMoney, June 4^th, 2012 [↩]