Nasdaq offers $40 million to cover Facebook losses, short of claims

(Reuters) - Nasdaq OMX Group Inc said it will offer cash and rebates totaling $40 million to compensate clients affected by the problems with Facebook Inc's initial public offering, an amount well short of the losses claimed by top market makers for the IPO.

After approval by regulators, Nasdaq said on Wednesday, $13.7 million would be paid to its affected member firms and the balance would be credited to members to reduce trading costs, with all benefits expected to be awarded within six months.

"Our expectation is that every firm will receive some measure of cash and that every firm will receive their full accommodation by year end if current trading patterns persist," Eric Noll, executive vice president for transaction services at Nasdaq OMX, said in a webcast to member firms.

The top four market makers in the Facebook IPO - UBS, Citigroup, Knight Capital, and Citadel Securities - together lost upward of $115 million due to technical problems that prevented them from knowing for about two hours if their orders had gone through after Facebook began trading.

Smaller market makers that might have suffered losses would also receive a part of the $40 million.

The idea of rebates has caused some concern at other exchanges. Sources at Nasdaq rivals said that such a plan would force brokers to trade at Nasdaq, taking market share from competing exchanges.

"We view that as inconsistent with the Exchange Act, discriminatory, unfair, whatever you want to call it," said an executive at one exchange.

Under the plan, investors who attempted to buy the company's shares at $42 or less, but whose orders were not executed, would be eligible for compensation. In addition, trades that were executed at an inferior price would also be eligible, as well as trades that did go through successfully but were not confirmed because of Nasdaq's technical problems.

A filing with the U.S. Securities and Exchange Commission is expected soon, and an executive from a rival exchange declined to comment until its publication.

Noll said Nasdaq is still engaged in a review process with the SEC.

He said that the factors that went into determining the $40 million figure included the exchange's liability cap of $3 million a month, Nasdaq's proceeds of $10.7 million from the Facebook IPO, and an estimated $7 million in revenue forecast over the next five years from Facebook trading and listing fees.

(Reporting By John McCrank; additional reporting by David Gaffen; Editing by Gerald E. McCormick and Steve Orlofsky)