[Infowarrior] - Nasdaq's Facebook Problem

[Richard Forno]

http://online.wsj.com/article/SB10001424052702303610504577416530447015656.html

May 20, 2012, 7:44 p.m. ET

Nasdaq's Facebook Problem

Exchange Says Glitches Affected Millions of Shares; IPO System to Be Redesigned

By JENNY STRASBURG, JACOB BUNGE and GINA CHON

The Nasdaq Stock Market said on Sunday it bungled Facebook Inc.'s FB +0.61% initial public offering, acknowledging that technology problems affected trading in millions of shares.

The trading glitches, coupled with underwhelming investor appetite for Facebook shares on Friday, fueled doubts about Wall Street's ability to handle hot IPOs.

"This was not our finest hour," said Nasdaq OMX Group Chief Executive Robert Greifeld. The main problem, he said, was a malfunction in the trading-system's design for processing order cancellations. Extensive testing Nasdaq had performed ahead of the deal failed to unearth the problem, he said.

Nasdaq delayed the start of trading in Facebook by 30 minutes on Friday as it raced to fix the glitch. More than 200 million shares changed hands in the first hour of trading, and more than 570 million during a day that traders say was marked by unease and confusion. The deal's underwriters worked to keep the stock from slipping below its $38 offering price. Shares closed just 23 cents higher—far short of the kind of first-day pop that signals a healthy offering.

Friday's technical problems left investors large and small with orders processed improperly, if at all. Some say they lost money and want compensation from Nasdaq.

Eric Noll, Nasdaq's executive vice president for transaction services, said the company is "rebuilding the entire book" to determine which investors should be compensated due to Nasdaq's system errors.

Nasdaq's plan to repay investors would require approval of the Securities and Exchange Commission, exchange executives said.

Nasdaq had competed fiercely with rival NYSE Euronext NYX +0.33% for the chance to list the deal. Nasdaq's board conferred Saturday about the problems. Officials said the company is planning to redesign its IPO systems.

Nevertheless, Nasdaq's Mr. Greifeld said the offering, which raised some $16 billion, was "very successful." A Facebook spokesman declined to comment.

The offering raised a host of questions about how Wall Street delivers on one of its most-basic functions—raising capital for young companies. It was the second technical snafu on a public offering in recent months for a major stock exchange touting sophisticated electronic-trading systems. In March, BATS Global Markets botched its IPO on its own exchange. BATS blamed a software glitch.

"These markets are so fast, and they have so much scale. You turn it over to machines at light speed, and nobody can react," said David Weild IV, a former Nasdaq vice chairman and now an adviser on market structure and stock offerings at Grant Thornton LLP. "This isn't good for trust."

Facebook's lackluster debut also focused attention on whether the company and its lead underwriter, Morgan Stanley, MS -0.82% were too optimistic about demand for shares as they raised the price and expanded the number for sale last week. Such a double-punch move is rare with IPOs because of fears it can dampen demand.

"They squeezed all the juice out of it," said one person involved in the deal.

Ultimately, the offering price was set at $38. Some people familiar with the matter said the fact that the opening trades were at around $42 showed the price was justified.

After the problems began on Friday, Morgan Stanley, which led a group of 11 Wall Street banks, stepped in to buoy the share price, according to people familiar with the matter. In its role as the deal's so-called stabilization agent, Morgan Stanley could continue to support the shares through a pool known as an overallotment. But people familiar with the matter say the bank has no plans to use its own capital to prop up the shares in the days ahead.

Nasdaq's Mr. Greifeld was at Facebook's Menlo Park, Calif., headquarters on Friday morning, where Mr. Zuckerberg rang Nasdaq's opening bell. In an interview that morning, Mr. Greifeld told the Journal that Nasdaq was "well prepared" for the start of trading.

But around that time, things already were starting to go wrong.

Nasdaq was accepting orders before trading began. But in some instances, if an investor then tried to cancel an order or change the price or size, Nasdaq didn't acknowledge the requests, confusing some traders, traders said.

Around 11 a.m., Nasdaq indicated there would be a five-minute delay in the deal, not abnormal for an IPO. When 11:05 came and went without the opening or further detail on when it would happen, anxiety spread.

Some traders say they jumped onto the open line Nasdaq had set up for communications during the deal. But traders said they received only intermittent promises of an update to come soon.

Nasdaq officials said Sunday that they confronted a problem they hadn't anticipated in test runs. They said trading volume in Facebook wasn't more than anticipated. But because of the size of the Facebook IPO and the level of investor interest, the process of matching up buy and sell orders to pinpoint the price of the first trade took slightly longer than normal—five milliseconds instead of three, according to Mr. Greifeld.

Meanwhile, Nasdaq's systems were hit with a wave of electronic messages to cancel trades or adjust orders for Facebook stock, according to people involved with the trading. Because the process of matching the first trade in Facebook shares was taking slightly longer than usual, some of those cancellation messages interfered with the process and caused it to reset. That created a loop, and Nasdaq officials worked for about 20 minutes to override the process and set the stock to open at 11:30 a.m.

As many as 30 million shares worth of trading were affected by the glitch, Mr. Greifeld said. Brokers and traders who placed orders during that period didn't know the status of those transactions until 1:50 p.m., when Nasdaq sent out confirmations of trading done in the IPO.

The troubles left some investors licking wounds. Some said they had put in orders to sell shares early in the day, but those orders didn't go through. By the time they discovered that in the afternoon, the share price had fallen, so they were able to sell only at the lower price.

Other traders and investors said that because they didn't have confirmations of their earlier buy orders from Nasdaq, they weren't able to sell those shares until after 1:50 p.m. when Nasdaq released the fills into the market.

On Saturday, one day after the deal, Facebook founder and Chief Executive Mark Zuckerberg married longtime girlfriend Priscilla Chan at his Palo Alto home.

—Ryan Dezember, Lynn Cowan and Shayndi Raice 
contributed to this article.


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