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!
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.