Bloomberg News

Trade Disorder Plagues Nasdaq Handling $16 Billion Facebook IPO

May 18, 2012

The window at Nasdaq as Facebook shares go public on May 18, 2012 in New York. Photographer: Spencer Platt/Getty Images

The window at Nasdaq as Facebook shares go public on May 18, 2012 in New York. Photographer: Spencer Platt/Getty Images

Facebook Inc.’s (FB:US) debut on the Nasdaq Stock Market turned into another setback for American equity exchanges, with the $16 billion initial public offering plagued by delays in trade confirmations, crossed quotes and signs that orders were mishandled.

The pricing of the first transaction (FB:US) took a half hour longer than Nasdaq planned. About 30 minutes later, the second- largest U.S. equities exchange operator reported an issue confirming trades (FB:US) from the opening auction with the brokerages that placed them. Nasdaq later established an appeals process for investors whose instructions weren’t carried out.

Scrutiny of American equity markets intensified in March when Bats Global Markets Inc., the third-largest U.S. stock exchange owner, withdrew its IPO after failing to trade on its own platform. Nasdaq’s mishaps, on a day when the most anticipated IPO of the year eked out a gain of 0.6 percent, disappointed investors hoping to erase the memory of Bats.

“It certainly wasn’t their best day,” Larry Tabb, chief executive officer of research firm Tabb Group LLC in New York, said in a phone interview. “That said, it also wasn’t a complete disaster. Nasdaq really needs to investigate what the challenges are and fix them quickly. There was a lot riding on this IPO and apparently it didn’t go so well.”

The U.S. Securities and Exchange Commission said it will review the trading. Nasdaq spokesman Robert Madden didn’t return calls and e-mails seeking comment. Jonathan Thaw, a spokesman for Menlo Park, California-based Facebook, declined to comment.

Treading Water

Facebook advanced (FB:US) 23 cents to $38.23 after surging as much as 18 percent. It fell as low as the IPO price of $38, which valued the company at $104.2 billion. More than 43 million shares were executed (FB:US) at that level, the second-most changing hands at any price except for $42, the opening auction price, data compiled by Bloomberg show. A total of 583 million Facebook shares traded.

Underwriters purchased shares to keep them from falling (FB:US) below $38, people with knowledge of the matter said. The bankers supported the stock amid Nasdaq’s difficulties delivering trade execution messages, said one of the people, who asked not to be identified because the transactions are private.

Facebook was originally scheduled to open at 11 a.m. At about 11:07 a.m., a Nasdaq official told market participants on a conference call that the exchange was delaying the opening. Aside from assurances that an update was coming, the phone line went silent until just before the first trade at about 11:30, according to two people who were on the call and asked not to be identified because the discussions were private.

Appeals Planned

Buy and sell requests that should have been filled in the opening auction, based on the exchange’s rules, weren’t, while cancellations for other trade requests were ignored, they said. Their employers plan to appeal some of the results they received for orders sent to Nasdaq today.

Nasdaq began experiencing problems with its bid and offer quotes (FB:US) after the opening auction trade. By 11:31 a.m., the exchange’s highest bid, or price at which market participants were willing to purchase shares, was $42.99, and its lowest offer to sell was $42.50, according to data compiled by Bloomberg. The quotes produced a so-called crossed market, where sellers appear to be asking less than buyers are willing to pay.

Other markets continued trading, usually with a difference of a few cents between their best bid and lowest offer. Nasdaq’s quotes (FB:US) were marked as manual and not electronically accessible, which allowed brokers and other exchanges to ignore the venue’s prices. Its offer price later dropped to $38.01 and remained at that level, almost $4 below the highest bid, until 1:49 p.m., according to data compiled by Bloomberg.

‘Don’t Like’

“Clearly investors would hit the ‘don’t like’ button,” Matt McCormick, who helps oversee $6.2 billion at Bahl & Gaynor Inc. in Cincinnati, said in a telephone interview.

The IPO price valued the company at 107 times (FB:US) trailing 12- month earnings, more than all Standard & Poor’s 500 Index stocks except Amazon.com Inc. and Equity Residential. The valuation also made Facebook, co-founded in 2004 by a then-teenage Mark Zuckerberg, the largest company to go public in the U.S.

Nasdaq said in a statement posted to its website at 11:59 a.m. New York time that it was having a problem delivering trade confirmations related to the IPO. “Nasdaq is working to deliver these executions back to customers as soon as possible,” according to the notice. The company said in a message at about 1:57 p.m. that the delayed messages had been sent.

No Confirmations

Customers of London-based Fidessa Group Plc, which helps asset managers track transactions, weren’t receiving confirmation of Facebook trades, according to an e-mailed statement. Michael Cianfrocca, a spokesman for Charles Schwab Corp. in San Francisco, wrote in an e-mail: “There are currently industrywide delays in reporting trade executions. These issues do not appear to be unique to Schwab.”

Uncertainty about whether orders received executions in the opening auction affected some clients of online broker TD Ameritrade Holding Corp. (AMTD:US), according to Steve Quirk, senior vice president of the trader group at the Omaha, Nebraska-based company. Facebook accounted for 22 percent of today’s equities volume at the firm, he said by e-mail.

“When you have a complex market system that gets overwhelmed, it fails in bizarre ways,” James Angel, a finance professor at Georgetown University in Washington, said in a phone interview. “If you don’t know whether you got filled, you don’t know your position. If you’re buying you might buy more shares and then suddenly you’ve got twice as many shares as you wanted. It makes it hard to do your risk management and hard for brokers to know how much credit to extend to customers.”

Nasdaq Shares

Nasdaq OMX (NDAQ:US) shares fell 4.4 percent, the most since October, to $21.99. NYSE Euronext gained 0.3 percent to $24.61.

Adding to the initial confusion surrounding the opening trade in Facebook was a halt in a company that generated (FB:US) 11 percent of the company’s $1.06 billion in first-quarter revenue. Zynga Inc. (ZNGA:US) failed to trade for almost an hour after being paused by a single-stock circuit breaker, designed to curb volatility when a price swings at least 10 percent in five minutes.

The stock was paused at 11:37 a.m. New York time after dropping as much as 14 percent to $7.08. Each circuit breaker normally lasts five minutes. It resumed at 12:29 p.m., only to be paused again when it rebounded from the earlier decline. The second halt lasted more than an hour.

Dani Dudeck, a Zynga spokeswoman, declined to comment.

“For many people, Zynga was a proxy for Facebook,”said Angel, a director of Jersey City, New Jersey-based Direct Edge Holdings LLC. “Nobody knew what was going on. Nasdaq may have had their hands full dealing with the Facebook glitches and may have just let it slide. That’s not a good sign.”

Federick’s of Hollywood

Loncor Resources Inc. (LN) and Frederick’s of Hollywood Group Inc. (FOH:US), both listed by a market owned by NYSE Euronext, and Nasdaq-listed MER Telemanagement Solutions (MTSL:US) Ltd. were halted between 12:22 p.m. and 12:24 p.m. New York time.

Facebook’s offering came as U.S. equity markets are mired in the worst slump since October. About $1 trillion has been erased from share values this month after speculation Greece will leave the euro region reversed the biggest first-quarter rally since 1998. The S&P 500 fell a sixth straight session, losing 0.7 percent to 1,295.22.

“It should be Nasdaq’s day to shine and instead it’s more questions and bugs in the system,” said Larry Peruzzi, senior equity trader at Cabrera Capital Markets LLC in Boston.

To contact the reporter on this story: Nina Mehta in New York at nmehta24@bloomberg.net

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net


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Companies Mentioned

  • FB
    (Facebook Inc)
    • $78.4 USD
    • 2.29
    • 2.92%
  • AMTD
    (TD Ameritrade Holding Corp)
    • $35.63 USD
    • 0.83
    • 2.33%
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