Nasdaq profits hurt by Facebook IPO costs, dark trading

By John McCrank

REUTERS - Nasdaq OMX Group Inc has set aside cash to reimburse firms harmed in Facebook Inc's botched market debut last May, and to possibly settle a regulatory probe into the matter, denting the exchange operator's first quarter profits.

Nasdaq reported on Wednesday $62 million of expenses for the reimbursement plan, and it has allocated $10 million toward the U.S. Securities and Exchange Commission probe into the problems surrounding Facebook's initial public offering.

As a result, net income attributable to the New York-based company for the quarter fell to $42 million, or 25 cents a share, from $84 million, or 48 cents a share, a year earlier.

Shares of Nasdaq were down 2.5 percent at $27.77 shortly after midday.

Stripping out one-time charges, Nasdaq earned 64 cents a share. That was 2 cents higher than analysts had expected, on average, according to Thomson Reuters I/B/E/S. Net revenue grew 1 percent to $418 million, as analysts had expected.

Retail market makers have estimated they lost a combined $500 million due to Facebook's IPO on May 18, when a systems failure at Nasdaq led to delays in order confirmations for many market participants. That left them trading in the dark during the frenzy of the leading online social network's market debut.

The SEC approved Nasdaq's reimbursement plan in March.

DARK POOLS

A multi-year decline in equity volumes has led Nasdaq to diversify away from transaction-based revenues, focusing on business units that provide a steadier income flow through providing services like technology and data to other companies.

The drop in stock trading volumes has been amplified at Nasdaq and other exchanges as so-called "dark pools" - trading venues that do not publicly display prices before orders are executed - have rapidly taken market share from "lit" markets.

Nasdaq Chief Executive Bob Greifeld, along with the CEOs of exchange operators NYSE Euronext and BATS Global Markets, made the case to the SEC in Washington DC on April 9 that trading on dark pools needs to be curbed in order to guarantee investors are getting the best prices for stocks.

"Price discovery happens in the lit market and that is for the common good, and the quality of price discovery is improved when more and more participants contribute to that price discovery," Greifeld told analysts on a call on Wednesday.

He said there are thousands of stocks that have 40 to 50 percent of their volume happening in the dark.

Originally, dark pools were venues where large institutional investors, like pension funds, could execute very large orders without tipping their hand to the broader market as to the size, helping them avoid negative price impacts. But now the average dark pool order size is in line with those on exchanges and the stock markets say off-exchange trading has grown 15 percent in the last five years to over 35 percent of all trading.

Greifeld said he remains pessimistic that the SEC will take action on dark pools, but said the exchanges are "seeing a climate that is more receptive to consideration of change."

Regulators in Canada passed rules in October requiring dark pools to offer significant improvement on publicly quoted prices, or to require a minimum size threshold. Australia is considering similar rules, which have resulted in a 25 percent decline in the quoted spread in Canada, the exchanges said.

Net U.S. equity revenue at Nasdaq last quarter fell 23 percent from a year earlier to $23 million, as its market share dropped to 18.4 percent from 21.3 percent.

NEW BUSINESSES

Nasdaq expects equity volumes to slowly improve, but it is not going to sit and wait for earnings to rise, and it has been busy on the deal front to help achieve that aim, Greifeld said.

On April 1, Nasdaq said it would buy electronic Treasuries-trading platform eSpeed from BGC Partners Inc for $750 million in cash, providing the exchange operator an entry into one of the world's largest and most liquid cash markets.

Greifeld said Nasdaq aims to sell Treasury products to its equities clients. He said he expects the business to really pick up when the U.S. Federal Reserve begins to slow down its bond-buying program to support the economic recovery.

Nasdaq said in March it planned to create a market for trading shares of unlisted companies in a joint venture with trading platform SharesPost Inc. And it announced in December it was buying Thomson Reuters Corp's investor relations, public relations and multimedia services units for $390 million.

Nasdaq on Wednesday estimated total operating expenses of $972 million to $1 billion, up from its forecast at the end of the previous quarter of $960 million to $990 million.

The estimate excludes expenses related to Nasdaq's cost reduction plan, Facebook reimbursements, SEC investigation, special legal expenses, or costs associated with the eSpeed and Thomson Reuters' unit deals.

(Editing by Gerald E. McCormick, Bernadette Baum and Richard Chang)