DealBook: Nasdaq Is Fined $10 Million Over Mishandled Facebook Public Offering

Bebeto Matthews/Associated PressNasdaq said it has put measures in place to prevent problems like the Facebook I.P.O. last May.

Nasdaq’s parent company will pay the largest fine ever levied against an exchange for “poor systems and decision making” both before and after the bungled Facebook initial public offering.

In the minutes after Facebook’s initial public offering spun out of control last year, executives at the Nasdaq stock exchange received an e-mail pleading for a pause.

“We are all trading blind,” said the message, which was sent by the chief executive of the trading firm Knight Capital, according to people briefed on the details of the e-mail. “Should you stop trading for some period of time so we can all catch up and actually understand our exposure?”

The confusion on the morning of May 18, 2012, had been caused by errors in Nasdaq’s computer programming, but executives at the exchange decided to ignore the request for a break and proceed with trading, leading to mounting confusion.

The back-and-forth is one of many details to come out on Wednesday when the Securities and Exchange Commission released the results of its investigation into the bungled Facebook I.P.O. The S.E.C. announced that the Nasdaq OMX Group will pay $10 million, the largest fine ever levied against an exchange, to settle accusations that it had violated numerous rules before and after the I.P.O.

The settlement helps Nasdaq put behind it an episode that hurt its reputation and damaged investor confidence in the stock market. But the investigation also suggests that Nasdaq’s shortcomings were, in some ways, much deeper and more widespread than previously understood.

The head of the S.E.C.’s market abuse unit, Daniel M. Hawke, said in a statement that there has been too much of a tendency to write off incidents like the Facebook I.P.O. as “technical ‘glitches.’ ”

“It’s the design of the systems and the response of exchange officials that cause us the most concern,” Mr. Hawke said.

Robert Greifeld, the chief executive of Nasdaq, wrote in an open letter on Wednesday that the company had put new safeguards in place to prevent future problems. But he also defended the company’s overall performance.

“While we prepared extensively for the Facebook initial public offering, including thorough tests of our systems with member firms, the challenges we encountered that day were unprecedented,” Mr. Greifeld wrote.

The mishandled Facebook I.P.O. was among a series of breakdowns that rocked the United States stock markets last year and led to questions about the safety and soundness of an increasingly complex and computer-driven system.

In addition to the $10 million fine, Nasdaq has already agreed to pay $62 million to the brokers who lost money because of the problems. Even that has not been enough to placate the firm that was hurt the most, UBS, which contends that it lost $356 million because of Nasdaq’s errors. UBS has said it plans to seek more money from Nasdaq through arbitration.

The S.E.C.’s findings could aggravate some of the remaining tensions over the Facebook I.P.O. because it reveals numerous and previously unknown ways that the exchange executives fumbled the incident.

The problems began before the I.P.O. when Nasdaq tested its computer programs, but only on 40,000 orders, according to the S.E.C. When it was time to begin actual trading, at 11 a.m. on May 18, the system was overwhelmed by 496,000 orders.

The deluge of orders sent Nasdaq’s computers into a continuous loop that made it impossible to establish a correct opening price for Facebook stock, which had priced at $38 a share the night before.

Nasdaq executives were immediately aware of the problems and summoned a “Code Blue” conference call, but they decided to proceed with the opening after making a few temporary fixes to the computer code and switching to an untested backup system, the S.E.C. found.

Once Facebook started trading at $42 soon after 11:30 a.m., numerous brokers contacted Nasdaq to complain that they still did not know how many shares of Facebook they had purchased. At 1:50 p.m., Nasdaq executives realized they had failed to execute tens of thousands of orders that had been sent in.

At that point, Nasdaq caused more problems by selling many of these shares into the market, leading to a sharp drop in Facebook’s share price. It closed at $38.23 after Facebook’s bankers stepped in to help support the stock. The company’s stock has never risen above its opening price of $42.05 and was trading down 3.2 percent on Wednesday, at $23.32.

The S.E.C. also reported that shortcomings in Nasdaq’s technology hit the stock of game-maker Zynga on the day of the Facebook I.P.O., causing big price swings in Zynga shares.

The S.E.C. said Wednesday that Nasdaq had broken market rules two other separate times. In October 2011 and August 2012, programming errors caused Nasdaq to mistakenly execute some customer orders below the publicly listed price.

Although the settlement could put to rest some of the speculation surrounding the exchange, it does not shine a positive light on Nasdaq and its management, said Patrick Healy, the chief executive of the Issuer Advisory Group, a capital markets consulting firm.

“It sure looks like the guy who couldn’t shoot straight,” Mr. Healy said. “There’s no question that it’s an embarrassment.”