Cogito Ergo Non Serviam

NASDAQ Bumbles Facebook IPO

The initial public offering of Facebook stock was supposed to have been a shining moment of glory for all concerned. It wasn't. The expected surge in the price never really happened as the stock finished up just 23 cents on the day. The underwriters appear to have been supporting the $38 level on a few occasions throughout the day. But the most egg wound up on the face of NASDAQ, which had trouble actually opening trading. Despite test runs, NASDAQ ran into problems it couldn't easily handle.

Fairness demands an appreciation for just how complex this sort of event is. The stock was set to begin trading at 11 am Eastern time. In the first hour of trading more than 200 million shares traded hands, and 570 million shares were shifted before the closing bell rang at 4 pm. And the culprit causing the delay appears to have been a "slow" matching of buyer and seller for the very first trade. NASDAQ OMX Group Chief Executive Robert Greifeld said this usually takes 3 milliseconds, and because of the interest and size of the Facebook IPO, it took 5 milliseconds.

The Wall Street Journal added, "Meanwhile, NASDAQ 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 am."

According to Mr. Greifeld, up to 30 million shares were affected by the problem. Moreover, buyers and sellers had to wait until 1:50 pm to receive confirmation of their trades. As a result, there are a great many people out there who lost money, or at least, they believe they have. NASDAQ is going to have to rebuild the entire book to figure out who deserves compensation. Any compensation will require SEC approval.

The SEC is going to be further involved, though, as a matter of course. "As is our practice, staff will review the incident with NASDAQ to determine its cause and steps that will be taken to address it," SEC spokesman John Nester stated after an inquiry from the Los Angeles Times. At this point, it's pretty clear that nothing criminal happened, but rather, there is a flaw in the system that desperately needs fixing for the market to operate with the degree of faith required.

Funny how quiet those demanding less regulation in the financial world are over this incident.

© Copyright 2011 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Ubuntu Linux.



Kensington Review Home