A Nasdaq OMX Group Inc. (NDAQ) official acknowledged that the exchange operator was unaware of all the problems affecting Facebook Inc.’s initial public offering as it worked to start trading on the morning of May 18, according to two people with direct knowledge of the discussions.
Had the scope of the issues with the IPO auction been known before it began, Nasdaq wouldn’t have moved forward, Eric Noll, the executive vice president for transaction services, said in a call with brokers today, according to the people, who asked not to be identified because the talks were private.
Nasdaq and Facebook ran into trouble when computer systems used to set the opening price were overwhelmed by order cancellations and updates during the “biggest IPO cross in the history of mankind,” Nasdaq Chief Executive Officer Robert Greifeld, 54, said in a call with reporters two days ago. The stock has declined 18 percent from the $38 price set by underwriters to today’s close of $31.
Order updates and cancellations totaling 30 million shares were submitted into the opening auction as it was being repaired between 11:11 a.m. and 11:30 a.m., Greifeld said May 20. About half of them may involve “some level of dispute,” he said. Nasdaq said in a notice yesterday that the 30 million shares weren’t included in the IPO cross. Greifeld said the delay in starting trading didn’t affect the price of Facebook (FB) shares.
Noll said Nasdaq has been talking to the Securities and Exchange Commission about the IPO auction, the two people with knowledge of the call said.
The exchange submitted a draft rule filing to the SEC to involve the Financial Industry Regulatory Authority in the adjudication process for the accommodation fund that enables it to pay member firms a total of $3 million for systems problems on its market, one person said. According to the person, Noll said Finra, which will review claims related to the IPO auction problem, will determine the aggregate amount of the valid requests.
Noll said Nasdaq hopes $13 million will be in the fund to repay brokers, one of the people said.
Earlier today, Greifeld acknowledged in a meeting with shareholders that “clearly we had mistakes” in the offering. Greifeld blamed “poor design” in the software it uses for driving auctions in IPOs in the conference call with reporters on May 20.
Noll said 1,000 labor hours of testing to ensure the process worked failed to reveal the issue that delayed Facebook’s open by half an hour on May 18, according to one of the people.
Robert Madden, a spokesman for Nasdaq, declined to comment, saying the communication was a “closed call to member firms.” Noll said in a statement provided by Madden: “My intention was to make clear that we believed we had a good solution in place and that if we had known the solution was inadequate, we would have fixed the issue with the right solution before going forward.”
To contact the editor responsible for this story: Nick Baker at firstname.lastname@example.org