Market Overview

Facebook Trading Glitches at NASDAQ Cost Investors

The Facebook (NASDAQ: FB) IPO has been an all-around debacle. Lawsuits have already been filed against Mark Zuckerberg, Facebook, Morgan Stanley, and the other underwriters. According to a new article at CNBC.com written by John Melloy, however, the most culpable party in the company's lackluster debut may be the Nasdaq Stock Market run by Nasdaq OMX Group (NASDAQ: NDAQ). According to Melloy's reporting, Facebook's big plunge on Monday (the stock closed down 11%), may have been an unintended consequence of technical glitches at Nasdaq on Friday when the stock began trading.

Here is what happened: On Friday, due to a "technical glitch" according to Nasdaq, the open of trading in Facebook was delayed. Then, making matters much worse, when the stock finally did start trading, some traders' orders didn't go through and others were filled at inferior prices later in the day. Furthermore, other orders were executed but were not confirmed until hours later. The result was that many investors were unsure about how many shares they bought or sold and at what price they were executed. Obviously, this was a big problem.

In particular, traders who were trying to buy or sell stock and did not have their orders executed have been materially financially damaged - more so those who were trying to sell, seeing as how the stock has plunged from its IPO price. In fact, the technical glitch may have contributed to Monday's plunge. The Nasdaq sent out an alert on Monday morning which said that any investor who lost money as a result of the technical problems could be eligible for reimbursement and that claims had to be submitted by noon on Monday.

According to Melloy, the plunge in FB at Monday's open was likely due in part to traders selling FB in order to be eligible to file a claim with Nasdaq. One investor that he spoke to, a hedge-fund manager, illustrated what may have happened. This investor said that he put in a market order on Monday morning for the same amount of FB shares that he unsuccessfully tried to sell on Friday at the open. He was filled at $35, which was $7 less than the $42 opening price on Friday - the price he would have gotten for his shares if his original order would have executed properly.

“Who knows how much selling pressure was added to the stock on Monday by people in my same situation?” said the hedge-fund manager. “My broker told me, ‘You're absolutely not alone. We're doing a ton of this.'" The investor filed a claim with Nasdaq through his broker, according to Melloy's article. The bottom line here is that a lot of investors may have been selling on Monday morning in order to be eligible to file a claim with Nasdaq.

Melloy adds that "Some investors may have just taken the Nasdaq alert as a directive to do so (sell). After all, if one still owns the shares, what loss could one attach to the claim?" Rich Repetto, a well-known expert on trading and exchanges, told Melloy, “My best guess — and it's just a guess at this point — is that losses similar to those claimed by that investor may total between $50 (million) and $100 million."

But wait, it gets even worse for all involved - the chances of these traders recouping a substantial portion of their losses is not good. Nasdaq's monthly liability for technical issues with its exchange is just $3 million. Although Nasdaq itself is pushing to have that number raised to $10 million in this particular case, it is very unlikely that harmed investors will be made whole.

There is also the issue of what will happen in cases where orders were put into sell at the open on Friday which were not executed, and the investors are still hanging onto the stock. "Repetto said it's unclear how FINRA or the third party that ultimately settles these claims will calculate what these investors will get in restitution if they still own the stock and therefore just have a paper loss."

What can be said for sure is that Facebook's IPO has been a major disappointment, and extremely costly for a great many investors. In light of the stock plunge, lawsuits against Facebook, Morgan Stanley, and the other underwriters, and the damage caused by Nasdaq's errors, all of the major parties in this deal have egg on their face.

Posted-In: CNBC News Hedge Funds Topics IPOs Events Global Media

 

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