Panelists Call Facebook IPO a ‘Black Eye’ for Industry

Nasdaq’s botched initial public offering of Facebook has seriously damaged investor confidence, said several industry leaders at a conference in New York. The remarks came at the Securities Industry and Financial Markets Association Tech Leaders Forum earlier this week. 

Speaking at a market structure panel on Tuesday, executives from NYSE Euronext, ConvergEx, BATS Global Markets and Direct Edge all lamented the technical problems that marred Facebook’s IPO. They emphasized that the industry has to do better in the future if it wants average investors to come back into the market.

“Overall, I think everyone would agree, this is a black eye for the industry,” said Joe Mecane, co-head of U.S. listing and cash execution for NYSE Euronext. He said while many customers have asked whether the technical failures were unique to Nasdaq, it would be difficult to say that similar problems couldn’t happen elsewhere.

Joe Cangemi, head of equity sales and trading for ConvergEx, said the Facebook fiasco was not only a technical problem, but also a failure in crisis management.

“We as an industry failed our investors,” Cangemi said. “Not only the exchanges, but the industry in general, became perhaps too comfortable.”

Moderating the panel was Richard Repetto, a financial analyst of brokers and exchanges at Sandler O’Neil & Partners. He began with an overview of what actually happened on the day of the May 18 Facebook IPO. Though the stock was initially priced at $38 per share, traders could place orders at whatever prices they wanted, so the exchange had to use a crossing system to minimize the number of orders that didn’t get filled. It was this crossing system that failed.

“When Nasdaq tried to do the cross in the morning, the influx of orders that they received was so strong that they weren’t able to do the cross,” Repetto said. “They had an emergency team come in and try to figure out how they would handle this.”

According to Repetto, Nasdaq was receiving orders on the server originally intended for the IPO, but new orders coming in at 11:10 were sent to a second server. It wasn’t until 11:30 that the exchange got things straightened out and Facebook started trading. Nasdaq printed the cross at $42 per share, but the stock fell rapidly.

Meanwhile, traders became frustrated when order confirmations failed to go out. Repetto said some traders went almost two and a half hours before getting confirmation. Markets were shaken, and Facebook’s stock underwent a steep decline. After a week, its shares were trading at less than $30.

Facebook isn’t the only stock to have IPO problems recently. BATS planned a public offering for March 23, but a technical glitch caused it to yank its own IPO.

Speaking on the panel, Chris Isaacson, chief operating officer for BATS, said that being both the issuer and the exchange, the company had the flexibility to halt the IPO. In the case of BATS, no investors were harmed, which unfortunately was not the case with Facebook, he said. 

Bryan Harkins, chief operating officer for Direct Edge, suggested the industry might need a hotline between all of the exchanges and regulators in order to deal with watershed events. He said companies and exchanges might receive a public relations beating for backing off from an IPO, but the overall blow to confidence from a messy offering could be even worse.

NYSE’s Mecane said the Facebook disaster has had an effect on overall volumes, and on retail volumes in particular. That seems to be backed up by an IPO survey put out by Tabb Group this month. The survey found the impact on investor confidence from the Facebook IPO is almost as great as the blow suffered from the “flash crash” of May 6, 2010.

Nearly 60 percent of the market participants surveyed by Tabb said they will be more cautious about participating in the next headline IPO.