I wrote a column yesterday about the problems Nasdaq (NASDAQ:NDAQ) had trying to execute the Facebook (NASDAQ:FB) IPO share trades on opening day, May 18th. Nasdaq completely botched the trading process on that first day, resulting in many trading errors and confirmation problems. Nasdaq CEO Robert Greifeld has been on an apology tour trying to explain what happened, but he has been apologizing to the wrong people. He is sorry about the damage this has done to all his Wall Street cronies who participated in and profited from the fiasco, rather than to the real victims, the retail investors who bought stock and trusted the system.
Yesterday's column gave the details of Nasdaq's internal investigation and what they plan to do about it. They are offering a paltry "accommodation" of $40M ($13.7M in cash and the rest in future commission discounts) to their market maker clients like Knight (NYSE:KCG) and Citibank (NYSE:C) hoping it will trickle down to the brokers and retail investors and put out all the raging fires around this debacle.
Meanwhile, lets go back to the first day of trading and see how big this problem really is. According to Nasdaq's own website, on opening day Facebook and the underwriters offered 421,233,615 shares at $38.00 to the public market, for an offer amount just over $16B. There was also an over allotment available of 63M shares in case of high demand, bringing the total to $18B. Nasdaq was in charge of getting these shares trading smoothly on the public markets, by coordinating the trades between their market maker clients like Knight , Citadel, UBS (NYSE:UBS) and Citigroup. These in turn coordinate the trades with brokers like etrade (NASDAQ:ETFC), TD Ameritrade (NYSE:AMTD) or Fidelity, who in turn take the orders from the retail investors like you. The market makers and brokers are claiming that the damages are much higher than $40M, somewhere in the $100M to $200M range. Knight has already stated it is disappointed in Nasdaq's offer and threatened further legal action.
As explained by the Nasdaq CEO on CNBC, they had trouble printing the cross, which means the algorithm they used to match up all the pre-market orders and determine the opening price was not working correctly. The opening was delayed several times until 11:30am, at which point orders started executing at a bogus number of $42 in spite of the fact there were more than enough shares available from the underwriters and Facebook at the $38 offering price to meet demand. Nasdaq has since rerun all the transactions and admits in their press release that all the $42 trades executed at the open of trading are invalid.
How many shares were traded at the bogus opening price? Let's look at the first day stats. According to CNN Money, this was an all time record for IPO volume, and more than 80 million shares were traded in the first 30 seconds of trading at 11:30am. These shares were trading at $42, not the $38 offer price. Even if they were limit orders, with a limit price higher than $38, the Nasdaq trading system should have filled them all from the existing pool of 421M shares offered at $38. This did not happen. So in the first 30 seconds, $240M more than the market offer price was charged to the investors who were buying the stock.
That $240M, which is a lot more than $40M, and which only accounts for the first 30 seconds of trading, went somewhere. Where is it? The market makers don't have it, they are all claiming major losses on the first day of transactions. The brokers don't have it, and the retail investors from whom it was stolen sure as heck don't have it either. The underwriters say they never got it either, and are also claiming major losses that day on behalf of their institutional investors. So where is it? That leaves Nasdaq or Facebook insiders holding the bag of ill gotten gains.
But that's not all. The total number of shares traded on the day was 567M shares, an all time record. That seems like a lot, but not when you consider that with the over allotment, 484M shares were available at the offer price of $38. And sure enough, the stock eventually barely managed to close the day at the offering price of $38, because many people who bought earlier in the day started selling later on after they got their delayed confirmations and saw all the chaos going on in the market. It has been reported that towards the end of the day Morgan Stanley was actually buying back shares on the open market to keep the price at or above $38, because their large institutional clients were on the verge of losing boatloads of money on all those offering price shares they bought.
This whole incident stinks to high heaven. How did Nasdaq come up with the bogus $42 price? Could it have anything to do with the fact that Facebook shares were trading on SecondMarket for about $42 a share back in April? Where did the $240M go? That was just the first 30 seconds of the crime spree. If the stock continued to trade above $38 during the 3 opening hours of chaos, Nasdaq and Facebook insiders could be on the hook for hundreds of $millions or even $billions more in missing funds. The total value of the trades that day was north of $22B, and none of it should have traded above $38.
In short, public confidence in the markets has been deeply shaken, the IPO market has been destroyed, and hundreds of $millions has been bilked from large and small investors, with no explanation of what happened or where it went. Instead Nasdaq is making a pitiful attempt at restitution, and is covering up and lying to everyone about the whole incident, while Facebook and it's AWOL founder have had nothing to say about any of it. Nice job everyone.
Disclosure: I am long FB.
Additional disclosure: I put in a pre-open limit order for FB on May 18th for 100 shares. It executed at $42. What a surprise.