If you bought Facebook (FB) shares on opening day, May 18th, you know what a crazy day it was. Nasdaq (NDAQ) completely botched the trading process on that first day, resulting in many trading errors and confirmation problems. Nasdaq CEO Robert Greifeld appeared on CNBC yesterday June 6th to discuss it as the company put out a press release to explain the results of its investigation into the problems. Nasdaq has decided to do a voluntary "accommodation" program to provide some compensation to some of the trades from that day. You can read the press release here
The key points of the program from the press release are these:
The program will provide accommodations involving three kinds of orders that were placed during the IPO cross:
- Sells priced at $42 or less that did not execute
- Sells priced at $42 or less that executed at an inferior price
- Buys priced at $42 that were executed in the cross but not immediately confirmed
CEO Griefeld clarified this further by describing the sequence of events. Trading was supposed to commence at 9:30am. It was delayed because of technical problems until 11:00am, then delayed again several times as Nasdaq attempted to post the cross, which they finally did at 11:30am. After that, no confirmations of any of the trades were posted until about 1:30pm. He claims all trades after that point executed normally.
In short, the first 4 hours of trading were pure chaos because of Nasdaq trading problems. Nasdaq has since rerun all the trades of the day as a simulation, and decided that all the trades as described above at $42 are invalid, so they have decided to provide $40M in compensation for these trades. Their "accommodation" proposal is now under review by the SEC.
So what does this mean to a retail investor who bought or sold shares that day? First your trade needs to have been executed at the magic number of $42. If you placed a pre-opening market or limit order, most likely it was, because apparently after the initial cross was posted, all the trades were happening at $42 for a period of time, which is why they are being invalidated. Second, this compensation, if any, will be 'trickle down' to you if you have a qualifying trade. Nasdaq's CEO made it clear several times that this accommodation only applies to Nasdaq's market maker customers, like Knight (KCG), Citadel, UBS (UBS) and Citigroup (C). These in turn may pass on some of it to your broker like etrade (ETFC) or Fidelity, who in turn may pass on some of it to you. The market makers and brokers are claiming that the damages are much higher, somewhere in the $100M to $200M range. Knight has already stated it is disappointed in Nasdaq's offer and threatened further legal action.
So what should you do? First call your broker and make sure your $42 trade is on their claims list that will be sent to the market makers and Nasdaq. The sooner Nasdaq understands to magnitude of the problem the sooner they will hopefully adjust their offer.
As it stands, you are not likely to get much from this offer because it is way too small, and because only $13.7M of it is being given to the market makers in cash, the rest is in future commission discounts. Nasdaq and the underwriters have done huge amounts of damage to the reputation of the markets and the future of IPOs, and the CEO of Nasdaq has apologized to the industry for the failures, but is completely tone deaf to the real losers in this fiasco, the retail investors who bought the stock and trusted the system. They need to do much better than this.
What would be a fair settlement? Of course the buyers knew they were taking a risk buying the shares, so they need to bear some of that. But on the other hand, in hindsight it is known that there were way more than enough shares available for everyone at the $38 opening price, but Nasdaq failed to execute the trades at that level. Instead it somehow came up with a bogus number of $42 which became the effective opening price for several hours. At the least Nasdaq, and perhaps with help from the underwriters, should provide an adjustment that prices any and all shares purchased by retail investors on May 18th at $38, or in most cases a $4 per share adjustment. That would be a good first step in getting back the credibility of the system.
Disclosure: I am long FB.
Additional disclosure: I researched all of this because I have one of the $42 trades on May 18th through Vanguard for 100 shares of Facebook. I am not holding by breath, and it will certainly be the last IPO I invest in through the public market mechanisms.