U.S. stock exchanges need the ability to halt trading in a given security on all venues when technical problems similar to Facebook Inc.’s debut threaten orderly buying and selling, an NYSE Euronext executive said.
While exchanges can halt transactions on their own markets, there’s no procedure to stop a company from changing hands everywhere, Joseph Mecane, co-head of U.S. listing and cash execution at NYSE Euronext in New York, said at a Securities Industry and Financial Markets Association conference yesterday.
Mecane’s comments come a month after Nasdaq OMX Group Inc., a rival exchange operator, struggled to start trading in Facebook. A technical glitch with the auction to set its first price delayed the open while Nasdaq’s efforts to fix the problem prevented trade execution reports from being disseminated for more than two hours, spurring confusion among brokers and investors. Equities trading is now spread across more than a dozen exchanges and electronic communications networks and broker-owned platforms including more than 40 dark pools.
“Sometimes as much testing as you do there are situations that come up that you can’t plan for,” Mecane said yesterday in a panel discussion at the Sifma technology conference in New York. “A lot of this increased speed and automation and infrastructure and complex routing comes at a cost.” The exchange that lists a stock needs the “ability to halt a stock in a situation where there is a problem,” he said.
No company has completed a U.S. IPO since Facebook raised $16 billion in the biggest-ever initial offering for a technology company on May 17, Bloomberg data show. The shares have fallen 16 percent since the $38 offer price. Nasdaq’s mishandling of the situation was a “black eye” for the securities industry, Mecane said.
Robert Madden, a spokesman for New York-based Nasdaq OMX Group Inc., declined to comment.
Joseph Cangemi, a managing director at ConvergEx Group, a New York-based broker, agreed there should be a so-called regulatory halt when a systems malfunction on an exchange that lists a stock affects trading across markets. Such a halt should supersede an exchange’s decision to stop trading on its own venue, he said in an interview after the Sifma panel.
Exchanges and regulators need a “hot line” or other ways to communicate for “watershed events” that can disrupt trading across venues, Bryan Harkins, chief operating officer of Jersey City, New Jersey-based Direct Edge Holdings LLC, which owns two U.S. equity markets, said on the Sifma panel. More communication among exchanges can help address problems before they snowball, he said.
Nasdaq’s problems with Facebook showed coordination among exchanges is necessary to ensure that problems on one market don’t spill into rival venues, Mecane said.
“Part of the confusion that came out of the transaction was because there was not a lot being said publicly,” he said of Nasdaq’s oversight of the Facebook IPO auction. “That lack of clarity contributed to a lot of the confusion going on.”
Facebook, owner of the biggest social networking website, was scheduled to open at 11 a.m. New York time on May 18 after the offering was priced by underwriters. At about 11:07 a.m., a Nasdaq official told market participants on a conference call that the exchange was delaying the opening. Aside from assurances that an update was coming, the phone line went silent until just before the first trade at 11:30 a.m., according to two people who were on the call and asked not to be identified because the discussions were private.
Another way to limit fallout from malfunctions would be for exchanges to wait to start trading shares in an IPO until the market that lists the stock gives an “all-clear” message following the execution of its opening auction transaction, according to Chris Isaacson, chief operating officer of Bats Global Markets Inc., who also spoke at the panel. The delay wouldn’t have to be more than 30 seconds and could be as brief as a few seconds, he said in a subsequent interview.
Exchange operator Bats, based in Lenexa, Kansas, withdrew its own IPO on May 23 after technical problems publishing its opening transaction prevented the company’s shares from shifting into what’s called continuous trading, or buying and selling after the initial auction. Bats “as the exchange as well as the issuer” halted trading in its own shares after the mishap, Isaacson said. It pulled the IPO later that day.
Trading on a stock’s first day as a public company is different than it is on subsequent days or weeks, in part because the company’s price must be tested by market demand without a price history. The listing market usually has a bigger portion of trading on the first day than it does subsequently.
Nasdaq traded 45 percent of Facebook shares on May 18 and accounted for 26 percent from May 21 through yesterday, according to data compiled by Bloomberg. The exchange traded 47 percent of the share volume in Carlyle Group Inc., which it lists, on May 3, its first day of public transactions, and has handled 29 percent since then. Nasdaq was 31 percent of Groupon Inc.’s volume on its Nov. 4 debut in the market and has traded 22 percent from Nov. 7 through yesterday, the data show.
“The vast majority of liquidity is going to be on the listing market on the first day of trading,” Isaacson said in an interview, underscoring the importance of that exchange to overall buying and selling during a stock’s debut. “Once the listing market transitions from the auction to the continuous market successfully, others could start trading.”
Mecane said the idea of competing markets delaying trading by a small amount of time is worth considering. The presumption among exchanges has been that once the opening transaction is published, trading in the stock is OK and other markets can compete with the listing venue, he said.
“For Facebook and Bats, the first print with the opening cross wasn’t necessarily positive confirmation that continuous trading was going to be orderly,” Isaacson said.