Facebook's much-hyped initial public offering is turning into the strangest IPO in history, as the various players involved in the offering -- Facebook, Morgan Stanley and Nasdaq OMX -- confront unanswered questions, lawsuits and regulatory investigations stemming from last Friday's less-than-stellar public company debut.
Seemingly at every level -- technological, investment and legal -- Facebook's IPO has suffered from a series of embarrassing blunders that have tarnished the reputation of Nasdaq, which experienced a technical malfunction in its software and infrastructure, and the IPO's lead underwriter, Morgan Stanley, which has been criticized for the way it hyped, priced and sized the deal.
Nasdaq OMX is under regulatory scrutiny for a series of technical glitches, while Morgan Stanley and other underwriters are facing allegations that they cut earnings projections and only informed select big institutional investors, which may or may not be a violation of securities laws.
While investors expected the social networking giant's stock to generate a small "pop" above its $38-a-share offering price on Friday, it required significant support from Morgan Stanley just to remain above the opening price, according to media reports. Today, Facebook's stock hovered in the $32 range.
After all of the hype, buzz and analysis, why did such a hot deal suddenly fizzle out?
Investors, traders and analysts continue to point fingers at Nasdaq, for software mishaps that occurred during Facebook's IPO. The software bugs caused delays in trading, which confused traders and investors. In addition, even though Facebook CEO Mark Zuckerberg symbolically pressed the "IPO" button at 9:30 a.m., it's not clear why the stock was scheduled to begin trading nearly two hours later, at 11:05 a.m. This alone may have raised the anxiety level of investors, convincing some to sit on the sidelines to see what was happening.
Nevertheless, even though the stock was slated to begin trading at 11:05 a.m., it was further delayed until 11:30 a.m. "The delay appears to be related to Nasdaq's computer systems not being able to handle what seems to be historic levels of demand and historic levels of trading volumes for one stock in a small amount of time," comments Scott Sellers, CEO of Azul Systems, a software provider which offers a version of the JVM (Java Virtual Machine) engineered for extreme scalability.
The 20 minute-delay caused anxiety among investors who had placed orders early in the morning and wondered what the opening price would be. "It's not a good thing for Wall Street to have this happen because of the scrutiny this IPO has been under, to be halted. There's definitely some black eyes on Wall Street now," says Sellers, adding, "If you're an exchange, this is your worst nightmare."
However, Sellers says, it's not atypical for an enterprise to be challenged with a large surge in volume of users. "It's not just Nasdaq, but every company out there can experience a problem with a change in the amount of data or users they need to handle.
"While there is no doubt that Nasdaq extensively tested its systems in advance of the Facebook IPO," he continues, "it's very difficult to plan in advance for these big surges in activity. You can try to simulate it, but ultimately there is some probability that your simulation isn't going to handle the real event."
In The New York Times Dealbook, Nasdaq's CEO Bob Greifeld admitted that the exchange had a malfunction in the software responsible for processing order cancellations. Greifeld said the Facebook IPO was successful but admitted it was not "Our finest hour."
The botched IPO at Nasdaq comes on the heels of electronic stock exchange operator BATS Global Markets having to withdraw its own IPO after a software glitch surfaced in March. In BATS's case, the company successfully completed the auction but had trouble transitioning to continuous trading when the technology bug surfaced.
According to Nasdaq's own post-mortem on what happened with the Facebook electronic IPO, it ran into problems when it was attempting to end the quoting period and execute the IPO Cross, matching buyers and sellers, and print the opening trade. As the software was recalculating the opening price, additional order modifications were received by the system. The problems took place within a 5 millisecond window, according to a story in Monday's Financial Times. "Because of a decision before to allow continuous order placement during IPOs, cancellations kept 'fitting in between the raindrops,'" during the 5 milliseconds it was taking to determine a price, in the words of Greifeld.
The fact that Nasdaq talked about a 5 millisecond window is not surprising in the world of trading today. "Those are the time windows that decisions are made in, [and] quite frankly [could be] much faster than that," says Azul Systems' Sellers. For computers and programs that trade, 5 milliseconds is a long time, he says. "You have to realize that an Intel microprocessor calculates 2.5 billion operations per second, so within 5 milliseconds you could still have 10 million calculations," he estimates. "You can imagine how many trades were going on in that timeframe."
Though Nasdaq had issues, Sellers says the exchange's monitoring systems did their job. "What likely happened was they recognized that there was a problem and they likely halted trading in that timeframe," suggests Sellers. "If those monitoring systems hadn't worked properly, then that time window exposure could have been wider."