The Securities and Exchange Commission has charged Nasdaq with a variety of securities laws violations resulting from its “poor systems and decision-making” during the initial public offering and secondary market trading of Facebook shares. In response, Nasdaq has agreed to settle the charges by paying a $10 million penalty —the largest ever against an exchange.

"Exchanges have an obligation to ensure that their systems, processes, and contingency planning are robust and adequate to manage an IPO without disruption to the market,” the SEC wrote in a statement announcing the charges and settlement on Wednesday.

According to the SEC's order instituting settled administrative proceedings, a design limitation in Nasdaq's system for matching buy and sell orders disrupted the Facebook IPO on May 18, 2012.

According to the SEC, members of Nasdaq's senior leadership team decided not to delay the start of secondary market trading, assuming they had identified and fixed a system limitation by removing several lines of computer code. That intended solution, however, failed to fix the problem and the decision to initiate trading triggered multiple regulatory violations and broke rules governing the price/time priority for executing trade orders. The problem ultimately caused more than 30,000 Facebook orders to remain stuck in Nasdaq's system for more than two hours, rather than being promptly executed or cancelled. An additional 8,000 orders were in trading limbo for about 20 minutes.

The matching of buy and sell orders in an IPO is referred to as "the cross." The SEC order alleges that Nasdaq officials noticed a discrepancy between the final indicative pricing and volume totals and the actual totals on its internal systems, a discrepancy that indicated there was still a problem with the cross and that some cross-eligible orders may not have been handled properly. “But Nasdaq failed to address this issue during the minutes and hours following the cross,” the order says.  

According to the SEC's order, Nasdaq also violated its own rules when it assumed a short position in Facebook of more than three million shares in an unauthorized error account. Its rules do not permit it to use an error account for any purpose. The exchange subsequently covered that short position for a profit of approximately $10.8 million, also in violation of its rules.

The SEC also charged Nasdaq's affiliated third party broker-dealer, Nasdaq Execution Services (NES), with failing to maintain sufficient net capital reserves on the day of the Facebook IPO as a result of the exchange's own Facebook trading through the unauthorized error account.

 The order censures Nasdaq and NES, imposes a $10 million penalty on Nasdaq, and requires both entities to “cease and desist from committing or causing these violations and any future violations.”

“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,” Daniel Hawke, Chief of the SEC Enforcement Division's Market Abuse Unit, said in a statement. “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.”

In March, the SEC approved Nasdaq's plan to pay out $62 million in compensation to firms that suffered losses during its botched execution of Facebook's IPO. That settlement fund was described as “woefully inadequate”  by UBS AG in a comment letter to the SEC. UBS estimated its losses “in excess of $350 million.”