The Facebook launch on Friday was much like that of a North Korean missile – much hyperbole, much cheerleading, displays of excited citizens crowding the public square, a launch… then a thud.
At this point, I have no interest in in opining on Facebook’s pricing, revenue persistence, market penetration, or all that fundamental stuff. Rather, I thought it may be interesting to point out some of the oddities that occurred during the day of the Taepodong-2… I mean, Facebook launch.
Let’s start with the opening. Slated to launch at 11:00, the first trade was delayed until 11:20. While Nasdaq is playing the role of Korean Rocket Scientist today, Telis Demos from Trading Technology wrote a nice piece on the cause of the delay. Here are a few quotes from the article (although I encourage you to read it in its entirety by clicking the link):
“And it was one quote cancellation sneaking into a five-millisecond window that caused about 20 painful minutes, watched live by the world on CNBC television, of the delay to the opening Facebook’s public offering on Nasdaq’s US market.”
“In brief, the problem was that the system took two extra milliseconds to calculate the opening price. Because of a decision before to allow continuous order placement during IPOs, cancellations kept “fitting in between the raindrops”, in the words of Bob Greifeld, Nasdaq’s chief executive, in the five milliseconds it was taking to determine a price.”
“As a result, Nasdaq had to manually override the process, which took up those 20 minutes. But the manual process meant that individual order confirmations were not sent out until almost 1.50pm, hours after the 11.30am opening print. Confusion reigned, and many blamed it for dampening demand for Facebook stock.”
I’m no rocket scientist myself, but this sure looks like the fingerprints of high frequency trading. Sneaking a big order cancellation in a five millisecond window would have been impossible for a human being – even the late, great Benevolent Dictator with all his superhuman skills.
The next oddity is brought to us by Nanex Research. Again, I suggest you visit their site for some great graphic illustration, but I’ll summarize a few of the conclusions here:
- Between 11:54 a.m. and 1:50 p.m. Nasdaq quotes stopped coming through the conventional channels. To quote Nanex, “Those who are co-located and get the direct feeds, namely HFT’s, didn’t experience this problem, as trades continued to come from Nasdaq.”
- At around 1:50 p.m., trades began mysteriously executing 120 milliseconds before the bids printed. Nanex calls this “fantaseconds, ” or evidence that HFT’s may now be able to 1) trade faster than the speed of light, or 2) orders are being routed in an unconventional manner that may be outside of the regulations.
- Later that same second (yes, as in 1/60 of one minute), trades were executed 900 milliseconds before the quotes were printed.
- At the same time, there were stretches where Facebook trades accounted for 100% of all Nasdaq stock trades.
The final extreme characteristic of this launch was Morgan Stanley’s role in supporting the missile’s $38 price. From Reuters:
- “Morgan Stanley may have spent billions of dollars to support the stock price by buying shares in the market. Some market participants said that the underwriters had to absorb mountains of stock to defend the $38 level and keep the market from dipping below it.”
- Morgan Stanley had access to 63 million shares in the over-allotment option, giving them plenty of ammo to hold the line at $38.
- Reuters also points out: “As an indication of the cost, had Morgan Stanley bought all of the shares traded around $38 in the final 20 minutes of the day, it would have spent nearly $2 billion.” That’s a lot of cabbage, if the stink over JP Morgan’s trading loss is any indication.
I think the autopsy of this IPO in the coming weeks will prove to be both interesting and educational. Has the HFT become self-aware and turned on its creator (Nasdaq)? What new procedures will be in place to keep a debacle like this from happening on future IPO’s? How much of a hit to capital will Morgan Stanley ultimately feel?
It’s rare that market sausage-making happens on a stage as large as the Facebook IPO. Maybe that will help be a catalyst for better understanding our brave new trading world.