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A series of technical issues delayed the opening trades in Facebook’s stock and caused confusion throughout the session, potentially helping to tamp down the stock’s first-day gains.
The glitches may damage the social network’s reputation among individual investors who were heavy users of the site and had hoped for first-day gains although trading stabilised in part due to buying by the initial public offering’s underwriters.
The confusion also hit Nasdaq OMX’s own stock amid worries that its status as a leading listings market for high-tech companies could be dented.
Scrutiny on exchanges’ role in the IPO auction process has been heightened by the recent botched IPO of BATS Global Markets, when the exchange operator experienced technical glitches during its self-listing that forced it to withdraw the IPO.
Nasdaq may face ire from traders and market-making firms who could not determine their positions, though some traders were satisfied with the overall process. The exchange held a call an hour after the market closed to discuss traders’ reports of bad trades and the Securities and Exchange Commission said it was reviewing the day’s events.
“The biggest issue for Nasdaq is possible reputational damage from these events as it attempts to win future listings business,” said Christopher Harris, exchanges analyst at Wells Fargo.
Nasdaq’s shares tumbled more than 2 per cent during the half-hour delay to Facebook’s opening and closed the session down 4.4 per cent at $21.99.
During the tense period between 11.05am, when the stock was meant to open, and 11:30am, when it did, traders said that it was apparent that a series of small technical glitches had delayed Nasdaq’s auction process.
According to multiple trading firms, there were disconnections from the exchange during the auction process, which resulted in quotes being cancelled.
There was also a failure in confirmations of whether or not orders to buy or sell shares at the opening auction price were executed. Nasdaq worked to resolve the issue, but as the minutes ticked by with the world watching a live feed of the pricing on CNBC, it decided to open trading without a solution, according to a person briefed on the process.
The shares opened at $42.05 and rose as high as $45 for an instant. But those trades were based on stale quotes, according to a trader at a market-making group. After a few moments around that level, the price began to drop.
The decline in the share price ended when the IPO price of $38 was reached. Traders and people close to the process said that underwriters stepped in to prevent the shares from falling below that level. Morgan Stanley, the lead underwriter, declined to comment.
This drew in other buyers, said Steven Spencer of SMB Capital who was trading in Facebook shares. “You could see the resistance and it traded right back up to $40,” he said.
Trading proceeded from there in an orderly manner. Facebook’s shares changed hands an enormous 83m times in the first minute of trading and ended the day with a record volume for an IPO of 557m shares traded.
But many traders in the auction still had not received confirmation reports by late in the day. Nasdaq said it was “investigating an issue in delivering trade execution messages from the IPO cross in symbol FB”.
When the problem was resolved just before 2pm, Nasdaq said: “Trade execution messages for the Facebook … IPO Cross have been electronically disseminated.”
However, according to multiple traders, when the confirmations were returned, some traders were surprised by the prices they received. Some of them received worse prices than they had anticipated or had their trades cancelled.
Nasdaq has not commented on this, but said it a statement it would attempt to resolve issues via a telephone hotline after the market close.
Trading into the close was tepid, with the shares closing at $38.23.
Reaction to the day among traders was mixed.
Active traders enjoyed the session, profiting from the gyrating prices between institutions who were looking to sell above $40, a price representing a valuation of nearly 60 times next year’s forecast earnings, and retail traders who wanted to increase their stake in Facebook.
“Some people made a lot of money picking lows and highs,” said Steve Ehrlich, chief executive of Lightspeed Financal, which caters to professional day traders.
RT Leuchtkafer, a private investor, did not believe that Nasdaq had managed the process poorly overall. “I think Nasdaq acquitted itself fairly well [amid] a big IPO and unprecedented retail interest,” he said.
However, Randy Warren, a financial adviser for wealthy individuals and small businesses, said the lack of a “pop” was “a major disappointment for buyers”, especially retail traders who were also users of Facebook.
Several market participants said the poor trading was due to institutions not buying at the rich valuation level of the pricing. But David Weild, president of Capital Markets Advisory Partners, said that the glitches kept some buyers out of the market.
“As a trader, you also have in the back of your mind the whole thing that happened to BATS,” said Mr Weild. “The glitches might have precipitated more selling, and the stock likely traded worse than it should have.”
Additional reporting by Arash Massoudi