How Facebooks stock fell

The troubles began with an unusual decision to jack up an already high IPO price by 20 per cent and to sell nearly 25 per cent more shares. The build-up around the launch had investors speculating they had to put in limit orders far above the 38 IPO price to get the number of shares they had applied for. But as a negative perception took shape before trading began,some investors cancelled their initial limit orders and placed new ones at lower prices.

Then initial trading on the Nasdaq electronic stock exchange was delayed,preventing some brokerage clients from cancelling their initial limit orders and leaving some investors with twice as many Facebook shares as they had wanted.

Technical issues resulted in traders failing to receive confirmation of the positions they had taken. This held up many client orders,leaving some investors and traders with losses as the stock price dropped.

May 18,2012

10:58am: Nasdaq issued a notice that the Facebook opening would be delayed until 11:05 am. IPO delays are generally not unusual,especially with a big launch such as Facebook. But then the revised start time passed without an opening trade on the stock.

11:13am: Nasdaqs next communication was a short emailed message to people who subscribe to such alerts. It said Nasdaq is experiencing a delay in delivering the opening print in Facebook,with no other details.

2ms: Behind the scenes,the massive order volume was pushing Nasdaqs systems to the brink. Orders that were supposed to be processed in 3 milliseconds were taking 5 milliseconds,according to a Reuters report that quoted a person familiar with exchange operations. This proved the tipping point. In the extra 2ms new orders flooded in,thwarting the systems ability to establish an opening price for the stock and leading to a backlog in unprocessed orders. Finally,a decision was taken to switch systems.

11:11am: A move to a secondary matching engine resulted in new buy orders,or changes in orders that came in later,not reflecting in the opening price. A matching engine is a computer that pairs bids and offers to complete trades. Eric Noll,Nasdaqs head of transaction services,admitted last week that the snag instead led to 2½ hours of uncertainty during which brokers were unable to see the results of their trades.

11:30:09am: The stock finally opened at 42.05 a share. After initially heading to a high of 45,it soon began to plunge towards its issue price at 38. Lead underwriter Morgan Stanley stepped in to defend the stock while some others,unsure whether their buy orders had been processed or not,either backed away from trading or started selling. Clients were informing their brokers they had not received confirmation of orders,something that normally takes seconds. Market-makers has no clue what they and their clients owned.

12-1pm: Shortly before noon,the exchange said in an email it was investigating the delivery of trade execution messages. An hour later,it said it was still working on those issues.

1:47pm: Nasdaq finally said it would electronically process all orders that were supposed to have been done at the opening price at 11:30 am.

1:49-1:51pm: More than 12 million Facebook shares traded in those two minutes. But market participants say these trades did not appear to be executed at the opening price of 42.05 but were instead recorded at the then prevailing lower price. The barrage of orders added to selling pressure as it created the perception that many were still trying to get out of the stock.

The fluctuation: The stock wobbled around 40 a share for another hour. More sellers came in,dropping it to near the 38 price,where it spent several minutes as lead underwriter Morgan Stanley defended that level. It dropped further later.

The fallout

The fiasco is widely expected to push more individual investors out of a stock market they already distrust after the financial crisis. The IPO produced the worst five-day return among the largest US deals of the past decade,dropping 13 per cent through May 24. The four big market-makers for Facebooks stock Knight Capital Group,Citigroups Automated Trading Desk,Citadel Securities,and UBS lost around 115 million between them.

Nasdaq has declared that for future IPOs it will use the software it currently runs for its regular opening and closing numbers,rather than that used in the Facebook launch. Nasdaq is facing lawsuits from investors and threats of legal action from brokers. Brokerages are working to resolve customer problems.

Parallels in India

On May 14,derivative traders realised during the afternoon session that something was amiss in the NSEs futures and options segment. None of the trades in the index-based derivative contracts was going through for over an hour. NSE attributed the fall to an erroneous order cancellation request.

On April 20 too,the Nifty NSEs benchmark 50-share index had gone into a sudden tailspin,shedding 86 points or 1.61 per cent during afternoon trades.

In ONGCs recent offer for sale,some bids by investors got initially rejected due to problems outside the exchange platforms. While the buy orders at both exchanges reflected a demand of 29.22 crore shares around the market close,there were certain orders that were not immediately confirmed or were erroneously rejected by custodians due to a mismatch at the custodians end,even though the orders were funded. This led to confusion and panic; the government stepped in to allay fears of manipulation.