Is Nasdaq to blame for Facebook’s share price?

By Felix Salmon
June 11, 2012
post-mortem on the Facebook fiasco today, pointing fingers very much at Nasdaq.

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The WSJ has a good post-mortem on the Facebook fiasco today, pointing fingers very much at Nasdaq. And clearly Nasdaq was Ground Zero for the trading problems the day that Facebook went public. But this kind of thing smells fishy:

Some hedge-fund managers called Facebook’s chief operating officer, Sheryl Sandberg, because they hadn’t received any trade confirmations from Nasdaq, says a person familiar with the phone calls. Some hedge-fund managers apologized to Ms. Sandberg and said they needed to sell their entire positions because of the confusion, the person added.

This clearly comes from Sandberg’s office, if not Sandberg herself — and it sounds very much as though she’s blaming Nasdaq for a lot of investors dumping Facebook shares on the opening day. If I were in her position, I’d do the same thing: it’s a lot easier than finding fault with, say, Facebook’s CFO, or blaming herself.

I don’t doubt that Nasdaq glitches did take the wind out of the Facebook share price, if indeed it did open with a pop at $42. (The WSJ casts some doubt on that, quoting the head of electronic trading at Deutsche Bank as saying that it was “mathematically impossible” to come up with a $42 figure if the cross had been calculated with all of the orders put in.) But with hindsight, and given the degree to which Facebook shares have slumped in the last three weeks and not bounced back at all, any problems at Nasdaq simply hastened a fall in price that was surely inevitable.

None of which is to exonerate Nasdaq at all. The WSJ article ends with a perspicacious quote from Joseph Cohn, a retail investor in New York state:

“My experience on that day is that the markets aren’t built to handle failure,” he said. “With technology, you’re able to accomplish a lot more, but when it fails, it fails miserably.”

This I think is what the SEC’s Mary Schapiro is talking about when she says that the Facebook IPO was reminiscent of the May 2010 flash crash. The US stock market, when it works, works fine. But it’s not robust at all; it’s certainly not what Nassim Taleb would call “anti-fragile”. That’s why Nasdaq did so much testing of their systems before the IPO: they knew that if the systems failed, the outcome could be horrible. As, in fact, it was.

IPOs are a particularly hard task for stock exchanges, as we saw first with the BATS IPO and now with Facebook. Normally, any given trade happens at a price very close to the previous trade — but in an IPO, no one really has a clue what the price should be, and demand can appear and dissipate much more quickly than we see in the normal course of secondary-market trading. Momentum traders rule, and value investors know that the best thing they can do is wait patiently until things quiet down. As a result, once Facebook stock started falling and the supportive bid from the underwriters went away, there was basically no bid any more. Hence the fact that it’s now trading more than $10 below the IPO price.

On the other hand, the stock genuinely has stabilized in recent sessions, trading in a narrow band between $26 and $28 for more than a week now. That’s a pretty good sign that the market has worked out what Facebook is worth — and there’s no reason at all to believe that there were multiple equilibria here, and that if the IPO had gone better then we might have had a similar week-long stretch of trading between, say, $42 and $44 per share. Sandberg should probably call up her ex-boss Larry Summers if she really believes that. It might be a comforting unfalsifiable thought, but it’s still untrue.

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