In the wake of Nasdaq’s technical glitches with the Facebook IPO last month, rival exchange executives said the major problem was “crisis management," and this has hurt investor confidence and resulted in lower trading volumes.
The controversy over Nasdaq’s handling of the botched Facebook IPO on May 19th and lesson learned from the incident became the central focus of the equity market structure panel at the SIFMA Tech Leaders Forum on Tuesday.
But while rival exchanges, NYSE Euronext, BATS Global Markets and Direct Edge sent executives to express their views, Nasdaq did not appear on the panel — even though its executive was listed on the program for several weeks. According to the moderator, Rich Repetto, a principal and analyst with Sandler O’Neil & Partners, Nasdaq was unable to be there.
Repetto ran through the facts of what happened on the day of the Facebook IPO when a software glitch delayed the social networking company's market debut by 30 minutes. Repetto then asked if the problem was specific to Nasdaq. In response, Joe Mecane, EVP of NYSE Euronext who runs the NYSE cash markets, said his exchange had a different process and he didn’t think that the specific problem that Nasdaq had would have happened at the NYSE. While not commenting further on the specific problem, Mecane said, “I think everyone would agree, this is just a black eye for the industry, noting that it’s had a negative effect on market volumes from retail investors and cast a pall on the IPO market. Mecane said there hasn’t been an IPO since Facebook’s debut on May 18th.
“We as an industry failed our investors. It’s unfortunate that it occurred,” said Joe Cangemi, head of equity sales and trading at Convergex. While Cangemi, the sole broker –dealer on the panel, cited the technological failure within one of the exchanges, he said it was more of a crisis management failure. Cangemi cited weaknesses in equity market structure as well. After surviving the financial crisis of 2008 and record volumes, Cangemi suggested that the industry had become complacent. “We’ve had a series of events that brought to light the weaknesses,” said Cangemi referring to the May 6 2010 Flash Crash and the Facebook IPO that has led to a loss of confidence.
However, rival exchanges didn’t fault Nasdaq for having technical problems, at least not publically; instead they were somewhat sympathetic. When moderator Repetto asked, “ Given the hype surrounding Facebook, shouldn’t there have been more contingency planning,” Chris Isaacson of COO of BATS Trading, said his exchange, which had problems with its own IPO offering on March 23rd, had tested extensively, but “We ran into scenarios we had not tested for and that tripped us up on March 23.”
Isaacson, continued, “I don’t think it’s correct to throw stones at Nasdaq. We took a beating in the press. We attacked the crisis communication in dealing with the street. We really do appreciate our customers’ support.” Isaacson note that BATS’ market share has bounced back and it had carried out the technology migration of Chi-X Europe over to the BATS platform in April.
But in BATS’ case, the firm withdrew its IPO and none if its customers were hurt, noted Isaacson. In the Facebook IPO, retail customers were irate because they didn’t receive confirmations for over 2 hours, so they tried to cancel their orders, but instead ended up buying more stock at $40 or higher prices after Facebook shares fell below its offering price of $38 per share.
Because the equity market structure is more complex now, Bryan Harkins, COO at Direct Edge said, “There needs to be more contingency planning during the IPO process. “I know it’s the American dream to go IPO. Lets face it —there are complex systems here. If the space shuttle doesn’t take off, we got to cool it,” he suggested.
Harkins noted, there are four major exchanges and 13 different exchange licenses, and it’s no longer the NYSE and Nasdaq that would make the final decisions.
Moving forward, exchange executives agreed that communication was an area to focus on. “When you are in the heat of battle,” Mecane noted, there was a lack of clarity, which made things worse.
Some talked about having a “hotline” for when situations like this arose in the future. One audience member submitted a question as to how the market structure needs to change to avoid black swan events?
While electronic markets work 99.99 percent of the time, said Cangemi, they can be more catastrophic due to processing and the inability to “pull the rip chord” in these types of events. Cangemi said that unexpected events like the May 6 Flash Crash could force the industry to move toward market-wide contingency plans. While discussion shifted to circuit breakers and the pending limit up/limit down regulations to prevent sudden moves or mini-flash crashes from occurring in individual stocks, Cangemi pointed out that it’s taken the industry three years to get to the point of implementing the price bands, both in terms of creating the idea and technologically providing a solution amongst a very diverse competitive market structure.
But Isaccson of BATS pointed out that May 6th was a market-wide/multi-market breakdown, while the Facebook IPO was a single listing issue spilling over into other markets. “I think we have to handle it differently,” he said. “We clearly need to come together to fix issues.”
One suggestion that Isaacson said BATS had proposed was that potentially on the day of an IPO that non-listing markets, wait for an all clear from the listing market before they accept orders.
So, while no quick fixes were decided on the panel, it was clear that exchanges want to cooperate to win back investor confidence. And now that the Facebook IPO is behind them, they have other matters to worry about, such as if their systems will hold up when the next macro-event (think Greece) happens.