How is FaceBook’s IPO like Erectile Dysfunction?

{UPDATE: Tuesday, 22 May 2012 – 2d story added}

Read on, to find out why.

(Oh, and please, dear reader, don’t make me spell it out why.)

And, as an interesting note aside, Mr. Zuckerberg was married yesterday.

Here’s wishing him and his bride all the best.

—

Nasdaq ‘embarrassed’ over Facebook IPO

By Telis Demos in New York, May 20, 2012 10:12 pm

Nasdaq OMX‘s chief executive admitted he was “embarrassed” by the delay in the opening trade of Facebook’s initial public offering and revealed that the exchange was in talks with regulators over potentially millions of dollars of customer claims.

Bob Greifeld said on Sunday that the 20-minute delay in trading of Facebook’s $16bn offering on Friday had been caused by a millisecond systems blip due to the largest IPO auction “in the history of mankind”.

The exchange has found itself in the spotlight after Facebook failed to deliver a first-day “pop” to investors, instead almost falling below its issuing price of $38. The shares, having risen briefly, quickly fell away to close the day with a gain of just 0.6 per cent, at $38.23.

As a result of the trading delay, Nasdaq was left with a position in Facebook shares that it was forced to liquidate, according to its own rules, generating $10m for the group. It plans to use that money, plus potentially more, to resolve disputes related to 30m 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, said Mr Greifeld. The SEC said on Friday it would “review” the incident.

The glitch highlighted the fragile nature of modern equity markets, in which exchanges must handle many thousands of messages each second transmitted by high-frequency traders.

Facebook’s IPO problem, coming just weeks after BATS Global Markets was forced to withdraw its IPO after technical glitches, is likely to raise concern over market structures.

Mr Greifeld went on to defend Nasdaq’s performance, citing its role in Facebook’s trading over the whole of the session, which saw more than 570m shares change hands, the largest ever number for an IPO.

“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.”

Nasdaq has now laid out the details of the glitch. In spite of testing 1bn in trading volumes under 100 different scenarios, the exchange 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”, the process of calculating the opening price, 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 of the glitch the exchange decided to print the opening trade manually but was then forced to delay the process of confirming individual trades.

Nasdaq has identified trading orders for some 30m shares that came in between 11.11am and 11.30am, when trading actually began. It estimates that 50 per cent of those may have resulted in improper trades but it is still investigating to determine how many grievances are legitimate.

Mr Greifield 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.

—

http://www.ft.com/intl/cms/s/0/83fc3c2a-a2bb-11e1-826a-00144feabdc0.html

—

May 21, 2012, 5:45 pm

Facebook Debut: Who Blew It?

By FLOYD NORRIS

The Facebook I.P.O. has left a lot of egg on faces around Wall Street.

Let us count some of the losers, reputation-wise, ranked from top to bottom.

FLOYD NORRISNotions on high and low finance.

1. High-frequency traders. Nasdaq blames order cancellations for its huge problems executing trades on the first day. It is easy — and correct — to say that Nasdaq should have better systems. But the societal benefits of allowing millions of trades to be posted and canceled within fractions of a second are hard enough to find in stocks for which there is a functioning market. When there is no market yet — just price discovery — is it unreasonable to ask that bids and offers be posted only by those who are willing to have the trades executed?

2. Morgan Stanley. It seems to have badly overestimated how much actual demand for the stock there was, as opposed to demand for shares from people who hoped merely to flip them immediately for a quick profit. As lead underwriter, it was Morgan Stanley’s job to analyze the market, and it appears $38 per share was a price too far. It remains to be seen how much of the underwriters’ fees were squandered supporting the price on Friday. Could it be that Morgan lost money on the most coveted assignment of the year?

3. Nasdaq. The fact that it seems to have lost a lot of orders is unforgivable. The fact that some did not know for hours if their orders had been executed is even worse.

4. Facebook. It did get what was obviously top dollar, but at the cost of leaving many of its fans with a bad taste in their mouths, not to mention losses on their investments.

5. Wall Street. In 2004, when Google went public, it used a reverse auction to let anyone get shares. You just had to submit a bid to pay more than the lowest price necessary to sell all the shares. Wall Street firms were underwriters, but they no longer had the power to steer hot shares to favored customers. That was a threat to the Street’s conventional ways of doing business, and the fact that Google shares leaped to $100 from an offering price of $85 on the first day made it look as if the company had left money on the table. There were suspicions at the time — with no direct evidence — that the underwriting firms might have been pleased with the outcome because it would show other companies that reverse auctions were not the way to go. In any case, such auctions did not catch on. Now Facebook has gone a much more traditional route, with unhappy results.

To defend Morgan Stanley, it is fair to note that Facebook went public in the face of a market roiled by European worries. It also went public to the most hostile publicity for a major initial public offering that I can recall.

Remember the good old days of 1999, when everyone thought you were lucky to get in on a big I.P.O.? Now the conventional wisdom, at least in some circles, was that the buyers were fools.

On Thursday, the comedian Andy Borowitz published an obviously made-up “Letter from Mark Zuckerberg,” Facebook’s founder and chief executive. It began:

Dear Potential Investor:

For years, you’ve wasted your time on Facebook. Now here’s your chance to waste your money on it, too.

Tomorrow is Facebook’s IPO, and I know what some of you are thinking. How will Facebook be any different from the dot-com bubble of the early 2000’s?

For one thing, those bad dot-com stocks were all speculation and hype, and weren’t based on real businesses. Facebook, on the other hand, is based on a solid foundation of angry birds and imaginary sheep.

On Friday, The New York Post ran a front-page article reporting that the Facebook shares were priced at $38. The headline, in huge type, was “Zuckered.”

The article began:

“Thanks, chumps.”

By midafternoon that day, the news was not how rich Mark Zuckerberg was, but how badly bungled the offering had been.

After a weekend of dissection of the state of the offering, Monday’s trading did nothing to make anyone look better — or the I.P.O. buyers look less like suckers. The shares opened at 9:30 a.m. at $36.53. The shares were at $35 within three minutes, and hit the day’s low of $33 at 9:53 a.m. They closed at $34.03.

Google turned out to be a great investment. Maybe Facebook will turn out the same way. But right now, those who bought are the subject of scorn from their friends. It is not a good way to begin life as a public company.

---

This post has been revised to reflect the following correction:

Correction: May 21, 2012

An earlier version of this post referred incorrectly at one point to the company that has gone a more traditional route on its initial public offering. It is Facebook, not Google.

—

http://economix.blogs.nytimes.com/2012/05/21/facebook-debut-who-blew-it/?pagemode=print