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Nasdaq to Detail Facebook Compensation to SEC Next Week

Nasdaq aims to file a plan next week with the U.S. Securities and Exchange Commission detailing how it will compensate market makers who lost money during the botched trading debut of Facebook, according to a person familiar with the matter.

The plan may also lay some of the blame for losses sustained by at least one of the market-markets on that firm's own technical problems, according to the person who had been briefed on Nasdaq's plans, but had not seen the proposal.

The filing would come more than six weeks after Facebook's May 18 initial public offering on Nasdaq, which is owned by Nasdaq OMX Group, and will be publicly available following the July 4 holiday, said the person, who asked to remain anonymous. The SEC process allows for a public comment period on such a plan.

The exchange and the SEC have been working together to make sure the language of the proposal is acceptable, according to this source and another person with knowledge of the situation.

Nasdaq did not immediately respond to a request for comment late Wednesday. The SEC declined comment.

Nasdaq's four largest market-makers in the $16 billion Facebook IPO - UBS, Knight Capital, Citadel Securities, and Citigroup's Automated Trading Desk - have estimated that they lost $200 million from Facebook trades entered May 18.

In addition, news reports have said UBS may have lost considerably more, perhaps $350 million.

The losses were caused at least in part by Nasdaq technical problems and a communications breakdown that prevented market makers from knowing for hours if their orders had gone through. Market-makers facilitate trades for brokers and are crucial to the smooth operation of stock trading.

The person briefed on Nasdaq's filing with the SEC said the document may point out that there also were internal issues at the market-makers that contributed to their losses.

The person and two market insiders said UBS in particular had internal system issues during the Facebook IPO that added to its losses.

UBS declined to comment.

Nasdaq has said it plans to put aside $40 million in compensation - $13.7 million in cash and the rest in trading discounts - to compensate market-makers for the losses. Nasdaq needs SEC approval for any amount over $3 million, based on current regulations that cap the exchange's liability.

Market makers have said Nasdaq's compensation plan falls short of what they are seeking.

Knight Capital and UBS have hinted that they could bring legal action against Nasdaq if the compensation does not cover their losses.

Once Nasdaq files its plan with the SEC, the Financial Industry Regulatory Authority can begin reviewing client transactions and claims from the Facebook IPO.

The SEC can take up to 240 days to consider Nasdaq's plan.

(Reporting By John McCrank; Additional reporting by Jonathan Spicer and by Suzanne Barlyn.; Editing by Jennifer Merritt, Alwyn Scott and Bernard Orr.)

Copyright 2010 by Reuters. All rights reserved.

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