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The repercussions from Facebook's botched initial public offering deepened on Thursday as Fidelity Investments found itself dealing with "thousands" of customers with order problems and Knight Capital demanded tens of millions of dollars in compensation from Nasdaq for trading-related losses.
A technical glitch delayed Facebook's market debut by half an hour on Friday and many client orders were delayed subsequently, costing some investors and traders big losses as the stock price dropped after an initial gain
The exchange operator is facing lawsuits from investors and threats of legal action from brokers that have been compensating customers for delayed trades.
Nasdaq also has to contend with the outside prospect that it could lose the Facebook listing entirely after having just obtained it.
Facebook shares (FB-Q) were up in mid-day trading, but action on its stock has essentially become secondary to the fallout from the IPO -- its price, its size, its execution and questions about selective disclosure of its financial prospects.
Regulators including the U.S. Securities and Exchange Commission, the Financial Industry Regulatory Authority and Massachusetts Secretary of the Commonwealth William Galvin are now looking into how the IPO was handled. The U.S. Senate Banking Committee is also reviewing the matter.
Advisers familiar with the situation at Fidelity said many investors are now finding out, nearly a week after the fact, that their orders were not executed at the prices they thought.
Fidelity, in a statement, said it was working with regulators and market makers on its clients' issues "and we will continue to do so until we are confident that Nasdaq has done everything it can to mitigate the impact to our customers."
Knight Capital's claims could end up dwarfing the Fidelity issues, though.
The amount sought by Knight, a leading market maker in U.S. equities, is nearly three times what Nasdaq has aside as compensation for trading losses.
"They are certainly facing the specter of some significant lawsuits if this pool is not enough," a source familiar with Knight's situation said.
FEWER PROBLEMS ELSEWHERE
Other firms said they did not have similar problems, though, raising questions about the scope of the losses.
The problems were where people were trying to cancel orders; we didn't have that," said Peter Boockvar, equity strategist at Miller Tabak & Co. in New York. "Because we didn't have a problem doesn't mean there weren't problems."
E*Trade Financial Corp said its market making operations realized losses of "well under a million dollars."
Charles Schwab Corp. had a "small number" of the "tens of thousands of clients" that traded Facebook whose issues still have not been resolved, a spokesman said. "Each one requires some analysis to resolve, which can be time consuming."
Nasdaq's troubles were reminiscent of the "Big Bang" era in the 1980s, which opened the London Stock Exchange to individual investors who would no longer have to trade through middlemen, said Larry Goldfarb, a New York-based compliance consultant.
Goldfarb, who worked in an accounting unit of the former Salomon Brothers at the time, was dispatched to London for nearly six months to help reconcile millions of transactions that overwhelmed technology at the exchange, he said.
As of mid-day Thursday, Nasdaq's stock (NDAQ-Q) was down nearly 6 percent from its last close before the Facebook debacle. Over the same period NYSE Euronext is down just 0.2 percent.
The slide in the shares is adding to the pressure on Nasdaq Chief Executive Robert Greifeld, who defended the exchange's performance at its annual meeting last Tuesday.