Facebook IPO: Market Makers’ Losses Make Up at Least $100 Million

Claims by four of Wall Street’s main market makers against Nasdaq over Facebook’s messed IPO are expected to exceed $100 million

Faceook's IPO was highly anticipated. But technical problems on the Nasdaq Stock Market delayed the stock's open on Friday. The stock closed nearly flat on its first trading day at $38.23. Photo: JuntosWorldwide/Flickr

Facebook debuted on the exchange May 18 and there was trouble immediately, reports The Huff Post. First the debut was delayed for 30 minutes due to technical difficulties. That was followed with an “overwhelming influx of orders” to buy, sell and cancel trades causing Nasdaq’s trading software to go haywire.

And now, according to Reuters, four of the top market makers in the Facebook IPO – Knight Capital, Citadel Securities, UBS AG and Citi’s Automated Trading Desk – collectively have lost arond $100 million from problems arising from the deal.

On Thursday Facebook shares ended regular trading up 3.2 percent at $33.03, about $5 short of their offering price.

However, Knight and Citadel are each claiming losses of $30 million to $35 million, potentially overwhelming a $13 million fund the exchange set up to deal with potential claims.

The questions arise about the role high-frequency trading played in the offering on the Nasdaq stock market last week.

“High-frequency traders absolutely caused this,” Eric Hunsader, founder and CEO of market data tracking firm Nanex, tols The Huff Post — which followed the Facebook IPO closely and has published several analyses of Nasdaq trading activity that day.

“HFT had something to do with it,” agreed Joseph Saluzzi, a co-founder of Themis Trading and a critic of unregulated high-frequency trading. “There were an excessive number of orders coming in and it’s impossible for a human to be doing that.”

“Nasdaq’s sole job is IPOs,” and still Nasdaq’s system couldn’t handle the number of orders, he said.

According to several analysts who cover exchanges, Nasdaq’s legal liability should be limited. They say that securities rules give Nasdaq wide discretion in determining what, if any, compensation it should pay to customers who claim that they suffered losses due to trading execution.

Nasdaq’s liability regarding client losses from certain trading issues is limited to $3 million a month under exchange rules.

Meanwhile, Nasdaq CEO Eric Noll addressed the concerns specifically on a conference call with brokers Tuesday – telling brokers that high-frequency trading did not play a role in Nasdaq’s technical difficulties.

“I don’t see why anyone would think that HFT had anything to do with it,” said Mark Gorton, founder of high-frequency trading firm Tower Research Capital. Facebook “was an overpriced IPO that did not attract the necessary swarm of greater fools to sustain that price.”

On Thursday, the leading bank in the offering, Morgan Stanley, held a conference call for its employees in which it detailed a plan to compensate losses on behalf of customers who lost money because of to first-day errors, even when the problems were caused by Nasdaq, according to The New York Times.

This move provided some positive attention for Morgan Stanley, which has been the subject of intense scrutiny for how it handled the public offering.

Morgan Stanley, Facebook and other underwrites face at least two lawsuits over the IPO. The suits allege that analysts at the large underwriting investment banks cut their second-quarter and full-year forecasts for Facebook just before the IPO and told only a handful of clients.

Facebook has called the lawsuits “without merit” in a statement. Morgan Stanley has declined to comment on the lawsuits.

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