The SEC's Play-by-Play of Nasdaq's Facebook Disaster

Photograph by Hideki Yoshihar/Aflo

Nasdaq OMX Group agreed earlier today to pay $10 million to settle charges over the spectacularly botched Facebook IPO last May.

In striking the deal, the exchange did not admit or deny allegations. But the U.S. Securities and Exchange Commission was kind enough to provide its own version of events, spelling out “a series of ill-fated decisions” that make for a fascinating read.

The most interesting part: At one point in the fray, Nasdaq allegedly made $10.8 million shorting Facebook shares. Which raises the question, couldn’t the SEC at least have wrung another $800,000 out of them?

Here’s how things panned out May 18, 2012, when everyone with a brokerage account was wondering whether to put money on the hoodie-clad prince of Silicon Valley:

Early in the day, when it became clear there were glitches in the system matching buy and sell orders, Nasdaq senior leadership called a “Code Blue” conference call, according to the SEC. We assume that’s better than a “Code Red,” but any color code can’t be great. After tinkering with their computer programs, the powers that be decided not to delay trading on the stock. Bad decision No. 1.

The pile of orders quickly swamped Nasdaq’s wiring, according to the SEC. In just 11 minutes, the Nasdaq system handling “the cross”—the matching of buy and sell orders—was allegedly about 19 minutes behind, an eternity in a high-frequency world.

Between 11:11 and 11:30 a.m., some 38,000 orders apparently plunged through the gap in Nasdaq’s wiring, flopping around on its cyber floor like a bunch of suffocating fish.

At 11:30, Nasdaq got 8,000 of those orders back in the flow, while 30,000 remained “stuck,” regulators said. At the same time, Nasdaq officials noticed a discrepancy between prices listed on closing trades and those on its internal systems, but did nothing about it, according to the SEC.

Meanwhile, Zynga shares got stuck in the quagmire. Nasdaq failed to properly execute 365 orders for Zynga, the feds said.

As it scrambled to catch up, Nasdaq dumped 3 million Facebook shares into something it dubbed an “error” account. They were promptly sold (presumably to investors who were waiting on orders to buy Facebook shares). All the while, the price of Facebook was plummeting. When Nasdaq bought the shares back to cover its position and close the account, it realized a $10.8 million gain, according to the SEC. If only every snafu was so sweet!

Though fascinating, none of this really matters to Nasdaq. Its biggest bruise in the whole fiasco may have been missing out on the Workday IPO, which went to the New York Stock Exchange just a few months later.

And the settlement is cheap compared with the $62 million Nasdaq spent to pacify market makers who lost money on the Facebook IPO and UBS’s alleged $300 million Facebook loss, which the bank is seeking arbitration on.

But today’s release suggests SEC sheriffs will be taking a harder line with Nasdaq and other exchanges. Daniel M. Hawke, chief of the SEC Enforcement Division’s Market Abuse Unit, had some particularly stinging words:

Too often in today’s markets, systems disruptions are written off as mere technical “glitches” when it’s the design of the systems and the response of exchange officials that cause us the most concern.

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