Nasdaq has agreed to pay a $10 million fine to settle charges that it violated securities laws with its mishandling of Facebook Inc.'s (FB) initial public offering last year, the Securities and Exchange Commission announced on Wednesday.
The SEC claims Nasdaq's securities laws violations resulted from its poor systems and decision-making during the Facebook IPO in May of 2012.
A statement from the agency indicated that the $10 million penalty is the largest ever levied against an exchange.
According to the SEC, a design limitation in Nasdaq's system caused disruptions to the Facebook IPO, and the exchange subsequently made a series of ill-fated decisions that led to the rules violations.
Members of Nasdaq's senior leadership team allegedly decided not to delay the start of secondary market trading in Facebook with the expectation that they had fixed the system limitation.
The SEC claimed the decision to initiate trading before fully understanding the problem caused violations of several rules, including the fundamental rule governing the price/time priority for executing trade orders.
The problem caused more than 30,000 Facebook orders to remain stuck in Nasdaq's system for more than two hours when they should have been promptly executed or canceled, the agency said.
Daniel M. Hawke, Chief of the SEC Enforcement Division's Market Abuse Unit, said, "Our focus in this investigation was on the design limitation in NASDAQ's system and the exchange's decision-making after that limitation came to light."
"Too often in today's markets, systems disruptions are written off as mere technical 'glitches' when it's the design of the systems and the response of exchange officials that cause us the most concern," he added.
Nasdaq OMX Group, Inc. (NDAQ) Chief Executive Officer Robert Greifeld posted an open letter following the news, calling the settlement another important step forward.
"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," Greifeld said.
He added, "In the last year, we have carefully reviewed these events. As market leaders, we view our experiences as opportunities to learn and improve."
Greifeld went on to say that the company has put in place innovative safeguards and taken a number of steps to help ensure that Nasdaq continues to deliver the world's best trading technology.
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