Nasdaq ‘embarrassed’ over Facebook IPO
Mr. Greifeld, speaking to reporters on Sunday, explained that the 20-minute delay in the initial trading of Facebook’s $16-billion (U.S.) offering on Friday was driven by a millisecond systems blip due to “the largest IPO cross in the history of mankind”.
The role of the exchange is in the spotlight after Facebook failed to deliver a first-day “pop” to investors, instead almost falling below its issuing price at $38. It closed the day with a gain of just 0.6 per cent, at $38.23.
The technical problems also highlight the fragile nature of modern equity markets, in which exchanges must be equipped to handle many thousands of messages each second sent in by high-frequency traders.
This system has attracted many critics, including some market participants, regulators and lawmakers. Facebook’s IPO problems, coming just weeks after BATS Global Markets was forced to withdraw its IPO after technical glitches, will probably only raise the volume on the issue.
But Mr. Greifeld defended his exchange’s performance and its role in Facebook’s trading over the whole of the session, which saw the most shares change hands ever for an IPO, more than 570 million.
“These problems are real, and we have to improve from the performance we had on Friday,” Mr. Greifeld said.
“We stand humbly embarrassed by that. But the rest of the day ... the system performed well, and we go into tomorrow knowing [that],” he added.
As a result of the delay, Nasdaq was left with a position in Facebook shares that it was later forced to liquidate, as per its own rules, generating $10-million for the group. It plans to use that money, plus potentially more, to resolve disputes related to 30 million shares that may have received improper trades.
It has requested approval from the US Securities and Exchange Commission to allow it to use the cash for those resolutions. The SEC said on Friday it would “review” the incident.
“We have spoken to the SEC, and we will be petitioning aggressively,” Mr. Greifeld said.
Nasdaq, after not communicating with reporters on Friday, has now laid out the details of the glitch. Despite testing 1 billion in trading volumes under 100 different scenarios, it was caught by surprise when cancellations of trades kept interrupting the computer system’s attempt to complete the auction and produce an initial price for Facebook’s opening.
Nasdaq says it designed its “IPO Cross” in such a way that would allow continuous trading through an auction at the behest of its customers, and has used the system in previous IPOs.
But in processing the huge volume of Facebook trades, it added two milliseconds to the time it took to produce an opening price. In that extra two milliseconds, orders to cancel the trades kept interrupting the auction process, or as Mr. Greifeld put it, “fitting in between the raindrops”.
Mr. Greifeld said: “On a real time basis with the pressure of the world upon us ... we intercepted this cross in a loop.” He said there was no discussion at any point of cancelling the IPO.
As a result, the exchange decided to manually print the opening trade, but was then forced to delay the process of confirming individual trades.
Nasdaq has identified some 30 million shares traded that came in between 11.11 a.m., when Facebook’s lead underwriter Morgan Stanley had authorized trading to begin, and 11.30 a.m., when trading actually began. It estimates that some 50 per cent of them may have been trades wrongly cancelled, but it is still investigating internally to determine how many grievances are legitimate.
“As much as we didn’t test for cancellations fully on scenarios, the team was well-drilled, and we know our products and we responded accordingly. [Our team] performed flawlessly,” Mr. Greifeld said.
He said Nasdaq was “working very hard with customers to make sure about the accommodations we give to respective customers”.
Eric Noll, executive vice-president at Nasdaq, said there were no other “systematic” technical problems, despite reports by some traders who said they were disconnected at times. He said he could not speak to individuals’ experiences.
New York Financial Times