Feeds

SEC slams NASDAQ with $10m fine for Facebook IPOcalypse

Regulator lambasts 'mind boggling' failures that led to busted IPO

The essential guide to IT transformation

NASDAQ is forking over $10m to the Securities and Exchange Commission as penance for its poorly executed Facebook IPO.

The fine was levied against the exchange for the Facebook IPOcalypse, which saw punters at first unable to buy shares in Zuck & Co's data farm social network, and then able to buy but only at unreliable prices.

"This action against NASDAQ tells the tale of how poorly designed systems and hasty decision-making not only disrupted one of the largest IPOs in history, but produced serious and pervasive violations of fundamental rules governing our markets," the SEC's co-director of its division of enforcement, George Canellos, thundered in a statement.

On the day of the Facebook IPO – May 18, 2012 – NASDAQ repeatedly delayed the start of trading. When trading did begin, problems with buy, sell, and cancelation orders meant some trades hung around for two hours – an eon in terms of a hotly anticipated IPO.

The problems were so great that NASDAQ failed to match buy and sell orders to create an average price for Facebook shares for the first 20 minutes. When it did manage to match them (complete "the cross," in stock market terms) and commence trading, it left out tens of thousands of orders, which the SEC says were "stuck" due to a weird software loop in NASDAQ's exchange software.

"This time discrepancy caused more than 38,000 marketable Facebook orders placed between 11:11am and 11:30:09am to not be included" the SEC said. "Approximately 8,000 of those orders were entered into the market at 11:30am, when continuous trading commenced, and the remaining 30,000 were 'stuck' orders."

NASDAQ eventually dumped 13,000 of these "stuck" orders back into the stock market at 1:49pm on the day (the rest were canceled), and in so doing, drove down the price of Facebook's shares by 93 cents between 1:50pm and 1:51pm because many of the 13,000 orders were selling large quantities of shares.

Failing to include trading orders that were lodged by punters is, we observe, something of a misstep for one of the world's largest stock exchanges – as is then including them in a giant batch that rapidly distorts the share price. NASDAQ executives were aware of this and briefly considered halting trading of Facebook in a executive teleconference code-named "Code Blue," but they thought better of it.

One reason for the trading problems could have been shoddy testing. In the run-up to the hotly anticipated IPO, NASDAQ created a test security named ZWZZT that traders could place dummy orders into. ZWZZT was limited to 40,000 orders, compared with the 496,000 orders that Facebook experienced on its first day of trading.

"I can summarize what went wrong in two words: inadequate testing," Eric Hunsader, founder of stock market analysis firm Nanex, tells El Reg. "I'm not talking about rigorous testing, moderate testing, bare minimum testing – I'm talking about even less than the bare minimum ... it boggles the mind."

No mention was made in SEC materials of whether NASDAQ had tested the system used to calculate the average price (the cross), but Hunsader contends that if they did any testing they would have spotted the problems.

The SEC fine is just another lash in the months of punishment that NASDAQ has been subjected to after the botched IPO. The exchange has already brutally slashed its CEO's end-of-year bonus by over half a million dollars and is preparing to pay out some of its $62m compensation pot to traders affected by the problems.

Citi is planning to file a claim to claw back some of the $20m in lost in the debacle, though the exchange got a reprieve in February when a judge denied a motion to move a class action suite against it to the New York Supreme Court.

Although $10m is the largest ever fine levied against an exchange, we're sure NASDAQ can take the cracking of this whip: NASDAQ OMX reported a net income of $349m in 2012. ®

5 things you didn’t know about cloud backup

More from The Register

next story
Microsoft exits climate denier lobby group
ALEC will have to do without Redmond, it seems
Caught red-handed: UK cops, PCSOs, specials behaving badly… on social media
No Mr Fuzz, don't ask a crime victim to be your pal on Facebook
Barnes & Noble: Swallow a Samsung Nook tablet, please ... pretty please
Novelslab finally on sale with ($199 - $20) price tag
Ballmer leaves Microsoft board to spend more time with his b-balls
From Clippy to Clippers: Hi, I see you're running an NBA team now ...
Kate Bush: Don't make me HAVE CONTACT with your iPHONE
Can't face sea of wobbling fondle implements. What happened to lighters, eh?
Video of US journalist 'beheading' pulled from social media
Yanked footage featured British-accented attacker and US journo James Foley
Amazon takes swipe at PayPal, Square with card reader for mobes
Etailer plans to undercut rivals with low transaction fee offer
Assange™: Hey world, I'M STILL HERE, ignore that Snowden guy
Press conference: ME ME ME ME ME ME ME (cont'd pg 94)
Call of Duty daddy considers launching own movie studio
Activision Blizzard might like quality control of a CoD film
prev story

Whitepapers

Implementing global e-invoicing with guaranteed legal certainty
Explaining the role local tax compliance plays in successful supply chain management and e-business and how leading global brands are addressing this.
7 Elements of Radically Simple OS Migration
Avoid the typical headaches of OS migration during your next project by learning about 7 elements of radically simple OS migration.
BYOD's dark side: Data protection
An endpoint data protection solution that adds value to the user and the organization so it can protect itself from data loss as well as leverage corporate data.
Consolidation: The Foundation for IT Business Transformation
In this whitepaper learn how effective consolidation of IT and business resources can enable multiple, meaningful business benefits.
High Performance for All
While HPC is not new, it has traditionally been seen as a specialist area – is it now geared up to meet more mainstream requirements?