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May 21, 2012 Nasdaq OMX Group Inc. (NDAQ), under scrutiny after shares ofFacebook Inc. were plagued by delays and mishandled orders on itsfirst day of trading, blamed poor design in the software ituses for driving auctions in initial public offerings. Computer systems used to establish the opening price wereoverwhelmed by order cancellations and updates during the biggestIPO cross in the history of mankind," Nasdaq Chief ExecutiveOfficer Robert Greifeld said yesterday in a conference call withreporters. Nasdaq s systems fell into a loop that preventedthe second-largest U.S. stock venue operator from opening theshares on schedule following the $16 billion deal, he said. While the errors were resolved and Facebook completed its offering,the day was another setback for equity exchanges trying to erasethe memory of the botched IPO in March by Bats Global Markets Inc.,another bourse owner. Nasdaq s issues contributed todisappointment among investors as Facebook (FB) s stock closed up0.6 percent after rising 18 percent earlier. It s amazing that both Bats and Nasdaq unfortunately failed inan inglorious way, William Karsh, the former chief operatingofficer at Direct Edge Holdings LLC, an exchange operator thatcompetes with Nasdaq, said in a telephone interview yesterday. Itproves that technology isn t infallible. There are so many movingparts that things can go wrong. That s the lesson we learn. The U.S. Securities and Exchange Commission said it will review thetrading. Jonathan Thaw, a spokesman for Menlo Park,California-based Facebook, declined to comment. Not Our Finest This was not our finest hour, Greifeld said, one day afterNasdaq s board convened to discuss the offering. Asked if his jobis secure, he said, I certainly hope so. Nasdaq will use an accommodation pool to pay back investorsthat should have received executions in the opening auction, basedon the decisions of a third-party reviewer, Greifeld said. It maytotal $13 million, he said. Problems surfaced on May 18 at 11:11 a.m. New York time afterMorgan Stanley (MS), one of the underwriters that sold 421 millionshares the night before, completed its role setting the price forthe trade in Nasdaq s opening auction, Greifeld said. Nasdaq ssoftware for IPOs allows investors to cancel or update details oforders until the auction runs. Trade requests received during the 5milliseconds it took to operate the auction disturbed the process,leading to an imbalance of buys and sells and sending the programinto a loop. Manual Intervention Nasdaq officials manually intervened to allow the auction to occurat 11:30 a.m. The IPO software didn t work even afterthousands of hours of testing for a hundred scenarios aimed atanticipating problems, Greifeld said. We re not happy with ourperformance, he said on the call yesterday. Volume during the auction amounted to 75.7 million shares, oralmost 1 percent of trading during the entire day on all U.S.exchanges, according to data compiled by Bloomberg. We saw on a real-time basis, obviously with the pressure of theworld upon us, that this was happening, Greifeld said. We thenmanually intercepted this cross, he said. That manualintervention said we had to ignore the cancels that came in betweenthe raindrops as we were processing the trade. Nasdaq wound up with 5,000 shares of Facebook because of itsintervention, Greifeld said. A broker was used to sell the stockthat had been placed in the exchange s so-called error account for$10 million. Greifeld said he would ask the SEC for permission toadd the money to the $3 million available from the exchange,according to its rules, to repay investors that should havereceived trades. Some Dispute Orders totaling 30 million shares were submitted into the openingauction between 11:11 a.m. and 11:30 a.m., Greifeld said. Abouthalf of them may involve some level of dispute, he said.Greifeld said he didn t think the delay in starting tradingaffected the price of Facebook shares. Adding to the day s confusion, Nasdaq reported an issue aftertrading began with confirming transactions from the opening auctionwith the brokerages that placed them. The exchange said in astatement posted to its website at 11:59 a.m. New York time that itwas having a problem delivering the messages. An update at about1:57 p.m. said they had been sent. When you have a complex market system that gets overwhelmed, itfails in bizarre ways, James Angel, a finance professor atGeorgetown University in Washington, said in a phone interview onMay 18. If you don t know whether you got filled, you don tknow your position. If you re buying you might buy more shares andthen suddenly you ve got twice as many shares as you wanted. Itmakes it hard to do your risk management and hard for brokers toknow how much credit to extend to customers. $42 at Auction Facebook advanced 23 cents to $38.23 after surging as high as $45.It fell as low as the IPO price of $38, which valued the company at$104.2 billion. More than 43 million shares were executed at thatlevel, the second-most changing hands at any price except for $42,the opening auction price, data compiled by Bloomberg show. Underwriters purchased shares to keep them from falling below $38,people with knowledge of the matter said. The bankers supported thestock amid Nasdaq s difficulties delivering trade executionmessages, said one of the people, who asked not to be identifiedbecause the transactions are private. Facebook was originally scheduled to open at 11 a.m. At about 11:07a.m., a Nasdaq official told market participants on a conferencecall that the exchange was delaying the opening. Aside fromassurances that an update was coming, the phone line went silentuntil just before the first trade at about 11:30 a.m., according totwo people who were on the call and asked not to be identifiedbecause the discussions were private. Ignoring Requests Buy and sell requests that should have been filled in the openingauction, based on the exchange s rules, weren t, whilecancellations for other trade requests were ignored, they said.Their employers plan to appeal some of the results they receivedfor orders sent to Nasdaq. Nasdaq began experiencing problems with its bid and offer quotesafter the opening auction trade. By 11:31 a.m., the exchange shighest bid, or price at which market participants were willing topurchase shares, was $42.99, and its lowest offer to sell was$42.50, according to data compiled by Bloomberg. The quotesproduced a so-called crossed market, where sellers appear to beasking less than buyers are willing to pay. Other markets continued trading, usually with a difference of a fewcents between their best bid and lowest offer. Nasdaq s quoteswere marked as manual and not electronically accessible, whichallowed brokers and other exchanges to ignore the venue s prices.Its offer price later dropped to $38.01 and remained at that level,almost $4 below the highest bid, until 1:49 p.m., according to datacompiled by Bloomberg. Don t Like Clearly investors would hit the don t like button, MattMcCormick, who helps oversee $6.2 billion at Bahl & Gaynor Inc.in Cincinnati, said in a telephone interview. The IPO price valued the company at 107 times trailing 12- monthearnings, more than all Standard & Poor s 500 Index stocksexcept Amazon.com Inc. and Equity Residential. The valuation alsomade Facebook, co-founded in 2004 by a then-teenage MarkZuckerberg, the largest company to go public in the U.S. Customers of London-based Fidessa Group Plc, which helps assetmanagers track transactions, weren t receiving confirmation ofFacebook trades, according to an e-mailed statement. MichaelCianfrocca, a spokesman for Charles Schwab Corp. in San Francisco,wrote in an e-mail: There are currently industrywide delays inreporting trade executions. These issues do not appear to be uniqueto Schwab. TD Ameritrade Uncertainty about whether orders received executions in the openingauction affected some clients of online broker TD AmeritradeHolding Corp., according to Steve Quirk, senior vice president ofthe trader group at the Omaha, Nebraska-based company. Facebookaccounted for 22 percent of equities volume at the firm, he said bye-mail. Clearing broker Pershing LLC told clients yesterday it workedthrough the weekend to address processing delays for purchases andsales of Facebook shares. The unit of Bank of New York Mellon Corp.expects to deliver trade information to customers account byaround 7 a.m. on May 21, the broker said in the message. Nasdaq shares fell 4.4 percent, the most since October, to $21.99on May 18 following the problems with the IPO. NYSE Euronext (NYX),its larger rival, rose 0.3 percent to $24.61. Facebook shares traded 582.5 million times on May 18, or about 6.6percent of total volume on U.S. exchanges, according to datacompiled by Bloomberg. I don t think you ll see a long-term downturn of volume onNasdaq, Karsh said. Nasdaq will pick up a couple percentagepoints because it s the primary listing venue for Facebook. 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