The plan, which Nasdaq has called its "definitive word" on the Facebook debacle, is under consideration by the SEC and brings into question the extent to which an exchange can be liable for technical slip-ups. U.S. exchanges match hundreds of billions of dollars of securities transactions every day.

Knight's support comes after Nasdaq increased the payback fund to $62 million in cash from an earlier $40 million, made up mostly of trading rebates, the market-making firm said in a letter to the U.S. Securities and Exchange Commission, dated August 29.

Nasdaq has around 300 member firms that trade on the exchange. Knight and other retail market-making firms and brokers together lost more than $500 million in the IPO.

Of the handful of comment letters on the compensation plan, two have voiced support: Knight's and hedge fund Citadel's. Seven -- from market makers, brokers, and lawyers for individual investors -- have called for it to be rejected.

"Although we would have preferred that the accommodation pool cover all losses sustained by Nasdaq members, we do support Nasdaq's proposal," Knight said in the letter.

Knight, which facilitates trades for other firms, had called Nasdaq's earlier plan "inadequate," and said it was considering legal action over the Facebook IPO.

Liabilities at exchanges, which have some regulatory duties, are capped in most instances. Nasdaq's cap is $3 million.

Much of the debate around the plan has focused on whether Nasdaq should be able to cloak itself in regulatory immunity in situations where it is operating as a for-profit entity.

LIABILITY

Facebook's eagerly anticipated IPO on May 18, which raised $16 billion, was initially delayed by 30 minutes due to a technical glitch at Nasdaq.

The exchange then made the decision to get the stock trading by using a secondary system that ended up leading to delays in many clients orders and confirmations, costing some investors and traders big losses as the stock price dropped after an initial gain.

UBS AG, which disclosed it lost more than $350 million, and Citigroup's Automated Trading Desk, which is said to have lost up to $35 million, have argued that Nasdaq should be responsible for all of the losses, because the decision to move forward with the IPO was a business decision made in haste.

Further, Citi said trading of Facebook should not have been allowed to continue during the confusion that followed.

But Knight, which said it lost more than $35 million in the IPO, urged the SEC to leave the discussion of liability limitations and regulatory immunity to another day. Citadel, which is said to have lost $20 million, made a similar request.

RELEASE WAIVER

Knight did urge the SEC to reject a portion of Nasdaq's plan requiring firms that sign on to waive their right to sue the exchange, likely before they know how much they will be reimbursed. Knight said that would set "a harmful precedent."

"Setting forth those types of requirements in the context of a rule filing inappropriately mixes commercial issues with regulatory requirements," Knight said in the three-page letter also addressed to SEC Chairman Mary Schapiro.

It said if the SEC disagrees and determines that some form of release is appropriate, it should only be sought after Nasdaq members are notified of the amount Nasdaq is willing to pay under the terms of the accommodation plan.

A Nasdaq spokesman had no comment on Knight's letter.

Nasdaq also faces regulatory investigations into its systems and actions during the IPO.

Knight had its own trading glitch on August 1, costing the firm $440 million and nearly forcing it into bankruptcy before a group of independent firms saved it with a $400 million investment.

(Editing by Walden Siew and Bernadette Baum; Editing by Gary Hill)

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