Tuesday, May 22, 2012

What Caused the Selling in Facebook Stock?

Facebook closed today at $31.12 per share, down more than 25% from its Friday high.

Traders are fuming at the way NADSDAQ and Morgan Stanley handled the deal.

Business Insider is reporting on a hedge fund manager that put $100 million into the deal.BI lists his allegations/claims/opinions NASDAQ as follows:
NASDAQ knew its systems were broken before the Facebook IPO, and instead of aborting the offering and facing huge embarrassment, it went ahead. Traders then lost hundreds of millions of dollars as they tried to buy and sell Facebook stock without getting confirmation that their trades had been executed.

NASDAQ made the problem worse on Monday. NASDAQ told traders who thought they had sold their Facebook stock on Friday—but had actually not—to fill out a form by noon. This form asked traders to list the price at which they thought they had sold their stock and the price at which they actually had. Problem was: Many of these traders had not yet actually sold their stock. Because the form required an actual selling price, many did, dumping tens of millions of shares of Facebook stock on the market, and sending the stock price plummeting.
Here's a play-by-play via Business Insider of how the hedge fund trader saw it go down:

Early on Friday there was euphoria. You started seeing these messages out of Europe about a market being made around $70/share. We started seeing allocations were out. We heard big firms that put in for big amounts were not getting it. We heard retail customers at small firms were able to get some stock: a couple thousand shares. Then you had guys with $20 million accounts at Goldman who were getting 200 shares total. It was just kind of messed up in allocation.

The message that this thing was getting traded in the $70s started getting tremendous hype. Then we started getting looks from the floor. The first was $50. Then $45. Then $42. Then it was holding at $42 for whatever reason. $42. $42. $42.
What happened was NASDAQ was delaying it.

NASDAQ held a conference call and they said we're going to delay.

While we were waiting for it to open, if you called the Morgan Stanley institutional desk, they would tell you "we can't put any buy orders in." If there were institutional investors who wanted to round out their positions they couldn't do at that point.
The stock opened at $42.

When you're trading big, big blocks, it goes to a trader. It goes to a desk. It's not done through a machine. The big blocks on the desk, they put their orders through NASDAQ, and they get a message of confirmation that NASDAQ has received your order.
But after Facebook opened up [the desks] didn't get the final piece: their orders were confirmed as received but not as filled.
The guys on the buy side were very happy because Facebook opened at $42 and was trading down. The guys on the sell side were in the dark, because they did not have a clear answer from NASDAQ that the trades were done or not.

The stock closed down because the people who thought they sold early didn't sell, so they sold as the day went on.
But you still had an estimated 30 million shares that were in the dark—people who wanted to sell.

So Friday closes, everybody is saying what the fuck, I don't know if I sold or not.

Then NASDAQ sent out a message saying "we will do a manual order close after the Friday close."

It appeared that NASDAQ was matching orders and putting them on the tape. We felt like we got our order: we thought we sold at $42.

We started asking questions: If we sold, who bought? My shares have to go to somebody. Who would be my contra-party? It would have to be NASDAQ. So we start wondering if NASDAQ was buying shares, or if we had actually sold.

Monday morning comes. The stock is trading at $38.25. NASDAQ calls brokers and says we cannot take a position in this stock.
NASDAQ has a rule that says this is how we handle computer f--kups. NASDAQ rule 4626. It says if we f--kup we'll pay it. They have a kitty of $3 million that they'll payout.

So they told us: You need to fill out a form that says what you thought you sold it at and what you actually sold it at. The message was: If you haven't sold it, sell it.

Their form is very basic. It has two pieces: What you should have sold it at and what you did sell it at. The form had to be in by noon. You couldn't send them a form if you didn't sell it. Your form that was due by noon would be incomplete. That forced everyone to take a loss.

We had to make a decision. We said book a loss and go to NASDAQ. In a heart beat, the stock goes to $36 because there was tremendous selling pressure in those 30 minutes.

So now we're waiting on NASDAQ. Rule 4626 also limits their liability on system crashes. They'll say to the member firms: you've agreed to this limitation.

But this was not a market crash.This was alike a spaceship that was about to launch and a flashing warning light goes off and they say I'd rather launch this thing than say abort this thing. They knew this thing was fucked and they just went in and did it. This isn't a computer fuck-up. The computers told them it wasn't working. Someone had to pull it.


  1. WTF, was this their first IPO?

  2. NASDAQ aside - nothing to do with the fact that it was an overpriced, over-hyped and over anticipated. It was a retail play for mums and dads to have a flutter.

    Now the task falls on Facebook to prove their earnings and potential for growth. Good luck!

  3. What Caused the Selling in Facebook Stock?

    I'd like to think it was sudden sobriety.

  4. Compute the FB market cap to sales ratio. Compare to Google. You will see why.