We received many calls on Friday looking for our take on how NASDAQ handled the Facebook IPO. We answered those calls fairly un-sensationally, and even congratulated NASDAQ for not BATS-ing. Looking back on Friday’s action, and our perceptions, we were actually relieved that Facebook didn’t do a Faceplant. Isn’t it sad that if an IPO does not flash crash, we call it a win nowadays?

But what was the real story on trading in Facebook Friday? Do we know? Well, as agency brokers we do not always see the full picture. The folks that do see that complete picture are almost always the owners of the markets – the institutional and retail investors. We received a note over the weekend from an old friend of ours, who is such an institutional investor, although not a client of ours.

His letter below describes a huge failure in the system, and how the mishandling of the Facebook IPO by All Those Responsible caused much harm for many investors, to say nothing of the harm to investor confidence. We share it with you, although we have left out his name at his request, to protect his identity.

Hey Joe and Sal,

 I wanted to reach out after this Facebook fiasco and share my thoughts and experience, as although not directly attributed to HFT, the Facebook opening was most definitely a disaster for the equity markets, and in my opinion the sanctity of capitalism itself. It is becoming obvious to me that as the powers that be rely more and more on computers and less on humans, the markets are fracturing and less reliable as proved by a) the mini crashes, b) the BATS IPO, and now c) now the Facebook IPO opening.

 It’s sad because I was at first happy to hear Facebook chose to list on Nasdaq, as I came up through the OTC space, but after the Facebook opening-disaster, part of me feels that if they had chosen a specialist… while it may have taken him a good 3-4-5 hours to stabilize 150million shares on the open, the stock would have opened properly and continued to trade in an orderly fashion.

 I don’t want you to think I’m a loon attaching these issues to the sanctity of Capitalism but if you think about it, a basic tenant of Capitalism is essentially the capital formation process, and as that process cracks, as evidenced by BATS and Facebook, it will be harder for companies to issue stock, as institutions and other market participants are unsure of liquidity and execution. The bottom line is if participants can’t trust that the market then will they trade?

 It’s sad that all the naysayers of Facebook were and are vindicated by this debacle, as it is for all the wrong reasons. Unfortunately besides guys like us there are few who truly understand how markets trade and why stocks do what they do trading-wise. Everything I read in the press and blogosphere (I can’t believe I had a use for that word) is on point about the fact that there was a system hiccup that affected trading, but in my opinion they truly miss the point that the price action after the opening failure was directly correlated to the failure of the system.

 From my perch we had all of our opening orders in on time and notated correctly, as venues like Instinet advised. The stock opened at $42, and quickly started to move higher until we, and others in the same boat as us, realized that we were unsure if our opening orders were in fact executed. When traders like us have that kind of uncertainty, our instincts are to flatten out in order to mitigate risk. This is exactly what happened as we and other market participants reacted to the NASDAQ-induced uncertainty, and the stock cratered towards the issue price of $38.

 The uncertainty surrounding whether  our orders were executed correctly at the opening print weighed on us most of the day – until around 2pm for us, and as late as 3pm for other firms. From what I can piece together, anyone who tried to make any changes to orders after 11:05am, those orders were not filled – and that is what you can attribute that second down-leg to. After the stock slowly worked its way back to $42, as traders realized that the orders they had on the open weren’t filled, they just dumped everything – bringing the stock once again back to the $38 issue price.

 I guess you can sum up my thoughts as follows. Yes computers are important tools in trading and finance, but that’s all they are – tools. The more we forget that, and rely on them to replace rationally-minded, veteran, and thinking human beings, the more we are jeopardizing the whole system. And I can justify my thoughts and feelings on computers because I cut my teeth working on them as I broke into the industry. I went from crawling under desks counting computer cables to talking to guys like you!

 I’m thinking after this week my biz in IPOs will most likely slow considerably so I’ll have plenty of free time to stop by and chat if you want.

 Be well guys, and thanks for fighting the fight!


Your friend,



Joseph Saluzzi (jsaluzzi-at-ThemisTrading.com) and Sal L. Arnuk (sarnuk-at-ThemisTrading.com) are co-heads of the equity trading desk at Themis Trading LLC (www.themistrading.com), an independent, no conflict agency brokerage firm specializing in trading listed and OTC equities for institutions. Prior to founding Themis, Sal and Joe worked for more than 10 years at Instinet Corporation, pioneers in the field of electronic trading, and at Morgan Stanley.

Category: Really, really bad calls, Technology, Trading

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

25 Responses to “So, You Think You Really Know What Happened with Facebook’s IPO on Friday?”

  1. YouthInAsia says:

    The sanctity of capitalism? The hell? Give me a break, if companies can’t get access to the capital they need…or if those wishing to risk capital don’t trust the allocation system, then a new system will rise into it’s place to replace the failed business model.

    Furthermore, “I-only” had orders in to buy the stock at $42…what were they going to do, immediately put in a trailing stop and try to profit off of the suckers? So because they couldn’t profit on the seconds/minutes time scale the sanctity of capitalism gets questioned? It’s guys like this clown that make me, the Average Joe, hate Wall Street. F him.

  2. Oral Hazard says:

    Basic tenet. Not tenant.

  3. asad says:

    So what’s the reason for the downturn today ? Was there a problem with buying the stock now ? If he liked it at $42 then he must love it at $34 ?

  4. cognos says:

    Blah… nothing “HFT” or even OTC / Nasdaq versus “specialist” had anything to do with “confirming orders”.

    That is either a mistake, or just PAR for such a large, oversubscribed IPO (that wasn’t really an “ipo” as the stock had traded in a private secondary mkt for 5+ years).

    I would say — Too expensive on price. A MUCH simpler explanation.

    Most telling in this (silly?) essay… the mention of “HFT” which is just non-sense. Is it a factor, yes? But if you are good… you buy the dip in AAPL and can take $Bs for the HFTs. If you let them push you around… they deserve your money (and provide massive liquidity to those of us, who are not pushed… no “stops” thats a money losing prop.)

    Hilarious… yeah, quant HFT guys… who had no data… they took your FB money. Not Zuckerberg and a $100bln valuation (3X GOOG at IPO?)

  5. louiswi says:

    I understand the folks at facebook had a choice where to list and they chose NASDAQ. If they didn’t realize it then, they and future IPO offerings will realize what a shithole NASDAQ has become.

  6. dkelland says:

    Amen. The valuation is ludicrous. This isn’t 1999. HFT may be a problem, but it shouldn’t be a scapegoat for the bankers who priced the stock at 100x earnings. On what basis did they arrive at this valuation? Publicity isn’t a corporate fundamental.

  7. Frwip says:

    I don’t get it.

    I haven’t heard of any major problem about General Motors’ or Visa’s fairly recent IPOs. May be it had to do with the fact they have a real business on which they could be valued.

    Now, Facebook is very difficult to value. A small gaggle of investors fed their own hype and frenzy and overpaid, thinking they had a sure shot for a quick buck. And it turned out they didn’t and that’s that…

  8. dss says:

    Capitalism worked well, the founders, their family, friends and others that were allowed to “invest” pre-IPO cashed out and everyone else is left holding the bag. What is a stock market for unless it is used to reward insiders and pretend to make markets for the rest of the rabble? It is business as usual, except the ugly part is there for everyone to see, unlike the olden days when they at least tried a little to hide the process.

    I don’t get why people are so upset; this is how it works for the 1% and the 99%. Maybe people are whining because they were treated like the rest of the rabble for a change.

  9. “…Publicity isn’t a corporate fundamental…”

    wtf? RU _______ (me/us)?

    Goodwill, anyone?


  10. Bob A says:

    If there is a God… Rupert Murdoch will fall in love with Facebook too

    The Rise and Inglorious Fall of Myspace
    It once promised to redefine music, politics, dating, and pop culture. Rupert Murdoch fell in love with it. Then everything fell apart

  11. plantseeds says:

    With all due respect…no one cares what really happened.

  12. [...] - So, you think you really know what happened with Facebook’s IPO on Friday? [...]

  13. Spinoza500 says:

    The Nasdaq failure made it harder for MS to support the price but we would have reached here in a couple of weeks in any case. Hubris, arrogance and greed has led Morgan Stanley to price this at $38 . Yes they convinced enough people of the hype to get the IPO away so in that sense a successful IPO. In the longer term however they have hurt the reputation of themselves, Facebook and equity markets .

    We are likely to see a new burst of QE (triggered by falling inflationary expectations) which will support markets over the next few months but every day the market seems sadly to take on more casino like features.

    How many houses came out in public with sales note on FB before the IPO !?! Bloomberg and CNBC discuss the GM decision to withdraw advertising but by and large they were suckered too by the excitement. It would be nice to see them start to represent investors as much as brokerage firms.

  14. Vivian Darkbloom says:

    “I don’t want you to think I’m a loon attaching these issues to the sanctity of Capitalism but if you think about it, a basic tenant of Capitalism is essentially the capital formation process…”

    Not that this makes the author a loon but, having thought about it, I wonder how much that tenant is paying in rent?

  15. ConscienceofaConservative says:

    Leaving alone the NASDAQ issue, I can’t help think that Morgan Stanley pushed the envelope too much with regards to an initial price. OK initial investors sold out at the best possible price, but by not leaving some profit on the table, it will be much harder for Morgan Stanley to unload future IPO’s onto a public that has lost much of its taste for equities these past twelve years.

  16. Petey Wheatstraw says:

    The hype exceeded the reality. As always, the adjustment from irrational, drunken exuberance to real-world, sober valuation will be painful.

  17. albnyc says:

    Occam’s explanation: “you f–ked up; you trusted us.”

  18. phb says:

    “The lady doth protest too much, methinks.”

    Zuckerberg is a genius and the “capitalistic” system we have was completely gamed. Think about it, FB has been trading privately for some time, interest in this social fad is waning, and if the movie Social Network is even remotely accurate, Zuckerberg is only interested in one thing, himself. MS, NASDAQ, and every house on the street is desperate for a hit takes his bait and rushes to market. Zuck and the rest of his gang sell enough shares to make things comfortable for years at the overpriced IPO price and the stock promptly falls. How is any of this unpredictable? Once again, the curtain has been pulled back on the public capital markets and we don’t like what we see? Someone will innovate and create a new system – unfortunately for Wall Street the destruction part of “creative destruction” is aimed squarely at the mess we have today.

  19. ericholtman says:

    “and the stock cratered towards the issue price of $38.”

    Don’t know if I’d refer to a stock going back to its IPO price on opening day as “cratering”.

  20. AHodge says:

    a rich mix of good comment here
    soooo… do we short it now or not?
    if markie and minions can spend billions to make it look good till (remaining) lockup comes off?
    will someone give me a lockup comes off schedule?
    i heard a lot in november?

  21. TDM says:

    If they had chosen a specialist and allowed all the new/modified/cancelled orders after beginning the auction then they would have probably never finished stabilizing the auction. They would never consider allowing any order changes if we had a human running the auction. NASDAQ quickly changed their policy to not allow any changes after the start of the auction so this problem should not happen again.

  22. Moopheus says:

    I hope “The Sanctity of Capitalism” is the title of this guy’s book. Seriously? What kind of a bubble do you have to be living in to think there’s any kind of “sanctity of capitalism?” But then, this is a complaint from a guy who was actually trying to buy FaceBorg stock, so, maybe his judgment is a bit skewed.

  23. Disinfectant says:

    The letter’s author is incorrectly described as an investor, when it is clear that he is a daytrader. An investor has no need to “flatten out” for the day because of uncertainty over execution, although he would certainly be reluctant to trade until the issue has been resolved. I’m not a big fan of HFT, but is this just sour grapes that the human trader can’t keep pace with the robots?

  24. ToNYC says:

    Sooooo, since the NYSE has migrated through Arca into being variously a garage and now a TV studio set; why not use the remaining NYSE humans to get the exclusive on pricing IPOs. They could make excellent
    umpires in HFT trade cancellation space as well. Take this is from one who wore a Goldwater pin when JFK was president, and making a living on Post 17.

  25. [...] So, You Think You Really Know What Happened with Facebook’s IPO on Friday? (The Big Picture) [...]