One of the most surprising aspects of the recently botched Facebook Inc. (FB) IPO was the multiple problems encountered in the actual exchange launch. After a long battle for the right to list Facebook's stock, the Nasdaq OMX Group's (NDAQ) exchange won that right on April 5th, winning out over bitter rival NYSE Euronext (NYX). The Facebook listing would add to the Nasdaq's line-up of leading name technology stocks, including Apple (AAPL), Microsoft (MSFT), and Google (GOOG). Valuewalk.com reported that Facebook "chose Nasdaq based on image and brand." It appears that image and brand may now have been damaged, and their own stock could suffer as a result.
Certainly the Nasdaq was not the only problem with the Facebook IPO (refer to my recent article "Facebook IPO - A Nightmare For So Many" for details on other problems with listing shares and price). The Nasdaq is now facing multiple claims for financial responsibility, and as a result, last week presented a $40 million plan to compensate investors, but it was quickly ridiculed by investors in the poorly run IPO. On Saturday, the Associated Press reported, "Swiss bank UBS AG may have lost as much as $350 million due to technical glitches on the Nasdaq stock exchange the day Facebook went public." This is a shockingly high amount when compared to Nasdaq's plan of $40 million for accountability.
The reports don't stop with UBS. Several other investors and firms have voiced concern over the inadequacy of Nasdaq's plan to make them whole. Also on Saturday The Economic Times reported Knight Capital CEO Thomas Joyce said losses related to Nasdaq's handling of the IPO were close to $200 million, far greater than the $40 million plan the Nasdaq laid out.
Adding to Nasdaq woes, on Friday the Wall Street Journal reported problems with Nasdaq's ability to process options orders for about 40 minutes. This is more unwelcome news and publicity the company certainly does not need right now.
With so much uncertainty over future liabilities related to the IPO, investors would be wise to consider avoiding Nasdaq stock, or perhaps shorting it. When considering whether to short a stock, it is important to look at 2 key factors - market news surrounding the company, and the market's reaction to that news. The market reaction is especially key for short-term investors or swing traders.
After reviewing the news surrounding the Nasdaq's handling of the Facebook IPO, let's take a look at the chart and what that is telling us about reaction to the news.
Click to enlarge.
(C) 2012 E-Trade
Investors in Nasdaq clearly took the news very hard, as there was a sell-off on heavy volume immediately following the botched IPO on May 18th. The stock continues in a channel downtrend, using the 20-day moving average line as resistance.
With so much uncertainty as to the amount of liability the Nasdaq is facing relating to the Facebook IPO, and the continuing concern surrounding the outcome, this issue is likely to drag on for weeks or months. Add to that market volatility over Europe and other global markets, and it appears that Nasdaq's stock is going nowhere in the near future, and should remain a short sale candidate.
Disclosure: I am short NDAQ.