‘Poor Design’ Delayed Facebook IPO: Nasdaq

Nasdaq OMX Group Inc. (NDAQ) (NDAQ), under scrutiny after shares of Facebook Inc. were plagued by delays and mishandled orders on its first day of trading (FB), blamed “poor design” in the software it uses for driving auctions in initial public offerings.

Computer systems used to establish the opening price were overwhelmed by order cancellations and updates during the “biggest IPO cross in the history of mankind,” Nasdaq Chief Executive Officer Robert Greifeld, 54, said yesterday in a conference call with reporters. Nasdaq’s systems fell into a “loop” that prevented the second-largest U.S. stock venue operator from opening theshares (FB) on schedule following the $16 billion deal.

While the errors were resolved and Facebook completed its offering, the day was another setback for equity exchanges trying to erase the memory of the botched IPO in March by Bats Global Markets Inc., another bourse owner. Nasdaq’s issues contributed to disappointment among investors as Facebook (FB) (FB)’s stock closed up 0.6 percent after rising 18 percent earlier.

“It’s amazing that both Bats and Nasdaq unfortunately failed in an inglorious way,” William Karsh, the former chief operating officer at Direct Edge Holdings LLC, an exchange operator that competes with Nasdaq, said in a telephone interview yesterday. “It proves that technology isn’t infallible. There are so many moving parts that things can go wrong. That’s the lesson we learn.”

The U.S. Securities and Exchange Commission said it will review the trading. Jonathan Thaw, a spokesman for Menlo Park, California-based Facebook, declined to comment.

‘Not Our Finest’

“This was not our finest hour,” Greifeld said, a day after Nasdaq’s board convened to discuss the offering. Asked if his job is secure, he said, “I certainly hope so.”

Nasdaq will use an “accommodation pool” to pay back investors that should have received executions in the opening auction, based on the decisions of a third-party reviewer, Greifeld said. It may total $13 million, he said.

Facebook advanced 23 cents to $38.23 on May 18 after surging as high as $45. It fell as low as the IPO price of $38, which valued the company at $104.2 billion. More than 43 million shares were executed at that level, the second-most changing hands at any price except for $42, the opening auction price, data compiled by Bloomberg show.

The shares slipped 8.5 percent to $35 as of 9:34 a.m. New York time today.

First Trade

Problems surfaced on May 18 at 11:11 a.m. New York time after Morgan Stanley (MS) (MS), one of the underwriters that sold 421 million shares the night before, completed its role setting the price for the trade in Nasdaq’s opening auction, Greifeld said. Nasdaq’s software for IPOs allows investors to cancel or update details of orders until the auction runs. Trade requests received during the 5 milliseconds it took to operate the auction disturbed the process, leading to an imbalance of buys and sells and sending the program into a loop.

Nasdaq officials manually intervened to allow the auction to occur at 11:30 a.m. The IPO software “didn’t work” even after thousands of hours of testing for “a hundred scenarios” aimed at anticipating problems, Greifeld said. “We’re not happy with our performance,” he said on the call.

Volume during the auction amounted to 75.7 million shares, or almost 1 percent of trading during the entire day on all U.S. exchanges, according to data compiled by Bloomberg.

‘Manually Intercepted’

“We saw on a real-time basis, obviously with the pressure of the world upon us, that this was happening,” Greifeld said. “We then manually intercepted this cross,” he said. “That manual intervention said we had to ignore the cancels that came in between the raindrops as we were processing the trade.”

Responding to the malfunction, Nasdaq altered its IPO procedures today. The exchange operator said it will no longer accept “cross-eligible” order modifications after the auction’s final price calculation has begun, according to an e- mailed statement.

Nasdaq wound up with 5,000 shares of Facebook because of its intervention, Greifeld said. A broker was used to sell the stock that had been placed in the exchange’s so-called error account for $10 million. Greifeld said he would ask the SEC for permission to add the money to the $3 million available from the exchange, according to its rules, to repay investors that should have received trades.

Some Dispute

Orders totaling 30 million shares were submitted into the opening auction between 11:11 a.m. and 11:30 a.m., Greifeld said. About half of them may involve “some level of dispute,” he said. Greifeld said he didn’t think the delay in starting trading affected the price of Facebook shares.

Adding to the day’s confusion, Nasdaq reported an issue after trading began with confirming transactions from the opening auction with the brokerages that placed them. The exchange said in a statement posted to its website at 11:59 a.m. New York time that it was having a problem delivering the messages. An update at about 1:57 p.m. said they had been sent.