The NASDAQ stock exchange has agreed to pay a $10 millionpenalty for violations that occurred during the initial publicoffering and secondary market trading of Facebook shares, the SECsaid Wednesday.

According to the SEC's order instituting settled administrativeproceedings, despite widespread anticipation that the Facebook IPO would be among the largest in history with hugenumbers of investors participating, a design limitation in NASDAQ'ssystem to match IPO buy and sell orders caused disruptions to thesocial media channel's IPO, the SEC said.

From there, NASDAQ then made a series of ill-fated decisionsthat led to the rules violations, according to the SEC.

Several members of NASDAQ's senior leadership team convened a“Code Blue” conference call and decided not to delay the start ofsecondary market trading in Facebook with the expectation that theyhad fixed the system limitation by removing a few lines of computercode, the SEC said, adding they did not understand the root cause of theproblem.

NASDAQ's decision to initiate trading before fully understandingthe problem caused violations of several rules, the agency said,including NASDAQ's fundamental rule governing the price/timepriority for executing trade orders.

The SEC said the problem caused more than 30,000 Facebook ordersto remain stuck in NASDAQ's system for more than two hours whenthey should have been promptly executed or canceled.

“This action against NASDAQ tells the tale of how poorlydesigned systems and hasty decision-making not only disrupted oneof the largest IPOs in history, but produced serious and pervasiveviolations of fundamental rules governing our markets,” said GeorgeCanellos, co-director of the SEC's Division of Enforcement.

The matching of buy and sell orders in an IPO is referred to as“the cross,” the SEC said. According to the agency's order, thesystems problems encountered during the Facebook IPO on May 18,2012, caused the cross to fall 19 minutes behind the ordersreceived by NASDAQ, whose IPO cross application calculated theprice and volume of the cross based on the orders and cancellationsreceived up until 11:11 a.m.

The SEC said this time discrepancy caused more than 38,000marketable Facebook orders placed between 11:11 a.m. and 11:30:09a.m. to not be included in the cross. Approximately 8,000 of thoseorders were entered into the market at 11:30 a.m. when continuoustrading commenced, and the remaining 30,000 were “stuck”orders.

Immediately prior to the cross, NASDAQ officials noticed adiscrepancy between the final indicative pricing and volume totalsand the actual totals on the exchange's internal systems, accordingto the SEC. This discrepancy indicated that there was still aproblem with the cross and that some cross-eligible orders may nothave been handled properly.

NASDAQ failed to address this issue during the minutes and hoursfollowing the cross, the SEC said. NASDAQ's Facebook issues alsocaused problems in the trading of Zynga shares, and NASDAQ failedto execute 365 orders for Zynga shares in accordance with theprice/time priority requirements, according to the SEC.

The exchange further violated its rules when it assumed a shortposition in Facebook of more than three million shares in anunauthorized error account, according to the SEC's order. NASDAQ'srules do not permit it to use an error account for any purpose.

The SEC said NASDAQ subsequently covered that short position fora profit of approximately $10.8 million, also in violation of itsrules. NASDAQ further violated its rules in three other ways duringthe opening of trading after the end of the display-only period forFacebook and following a halt in Zynga trading.

The SEC's order also charged NASDAQ's affiliated third partybroker-dealer NASDAQ Execution Services with failing to maintainsufficient net capital reserves on the day of the Facebook IPO as aresult of NASDAQ's own Facebook trading through the unauthorizederror account.