Nasdaq blames software design for Facebook IPO delay
NASDAQ, under scrutiny after Facebook shares were plagued by delays and mishandled orders on its first day of trading, blamed "poor design" in the software it uses for driving auctions in initial public offerings.
Computer systems used to establish the opening price were overwhelmed by order cancellations and updates during the “biggest IPO cross in the history of mankind," Nasdaq chief executive Robert Greifeld said last night .
Mr Greifeld said the exchange was "humbly embarrassed" over what happened.
Nasdaq’s systems fell into a “loop” that prevented the second-largest US exchange from opening the shares on schedule following the $16bn deal, he said.
The exchange's issues contributed to disappointment among investors on the first day of trading, as Facebook’s shares closed up 0.6pc after rising 18pc earlier on Friday.
The US Securities and Exchange Commission said it will review the trading. Jonathan Thaw, a spokesman for Menlo Park, California-based Facebook, declined to comment.
“This was not our finest hour,” Mr Greifeld said, a day after Nasdaq’s board convened to discuss the offering. Asked if his job is secure, he said, “I certainly hope so.”
Nasdaq will use an “accommodation pool” to pay back investors that should have received executions in the opening auction, based on the decisions of a third-party reviewer, Mr Greifeld said. It may total $13m, he said.
Problems surfaced on May 18 at 11:11 am New York time after Morgan Stanley, one of the underwriters that sold 421m shares the night before, completed its role setting the price for the trade in Nasdaq’s opening auction, Mr Greifeld said.
Nasdaq’s software for IPOs allows investors to cancel or update details of orders until the auction runs. Trade requests received during the 5 milliseconds it took to operate the auction disturbed the process, leading to an imbalance of buys and sells and sending the program into a loop.
Nasdaq officials manually intervened to allow the auction to occur at 11:30 am The IPO software “didn’t work” even after thousands of hours of testing for “a hundred scenarios” aimed at anticipating problems, Mr Greifeld said.
“We’re not happy with our performance,” he said yesterday.
Volume during the auction amounted to 75.7m shares, or almost 1pc of trading during the entire day on all US exchanges, according to data compiled by Bloomberg.
Nasdaq wound up with 5,000 shares of Facebook because of its intervention, Mr Greifeld said. A broker was used to sell the stock that had been placed in the exchange’s so-called error account for $10m.
Mr Greifeld said he would ask the SEC for permission to add the money to the $3m available from the exchange, according to its rules, to repay investors that should have received trades.
Orders totaling 30m shares were submitted into the opening auction between 11:11 am and 11:30 am, Greifeld said. About half of them may involve “some level of dispute,” he said.
Mr Greifeld said he didn’t think the delay in starting trading affected the price of Facebook shares.
Facebook advanced 23 cents to $38.23 after surging as high as $45. It fell as low as the IPO price of $38, which valued the company at $104.2bn. More than 43m shares were executed at that level, the second-most changing hands at any price except for $42, the opening auction price, data compiled by Bloomberg show.
Underwriters purchased shares to keep them from falling 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.