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Nasdaq Fined $10M Over Facebook IPO Failures 91

Posted by Soulskill
from the doling-out-wristslaps dept.
twoheadedboy writes "Nasdaq has been fined $10 million by the U.S. Securities and Exchange Commission over 'poor systems and decision-making' during the Facebook initial public offering. When Facebook went public on 18 May 2012, it was hoping for a major success, but technical glitches and poor decision making at Nasdaq caused real problems. The SEC said 'a design limitation' in the system to match IPO buy and sell orders was at the root of the disruption, thought to have cost investors $500 million. Orders failed to register properly, leaving banks like Citigroup and UBS in the lurch and making additional, unnecessary bids. They may still win money back from Nasdaq if legal challenges go their way."
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Nasdaq Fined $10M Over Facebook IPO Failures

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  • by Anonymous Coward on Wednesday May 29, 2013 @04:01PM (#43853771)

    The SEC said 'a design limitation' in the system to match IPO buy and sell orders was at the root of the disruption, thought to have cost investors $500 million.

    Nasdaq has been fined $10 million by the U.S. Securities and Exchange Commission over 'poor systems and decision-making' during the Facebook initial public offering.

    And people wonder why the average person hates the very idea of the stock market.

    • by ranton (36917)

      Large lawsuits are already in the works. I assume that this fine makes it easier for the plaintiffs to show Nasdaq did do something wrong, but IANAL. I doubt that Nasdaq will get off this easy.

      Now we just need to punish the people who valuated Facebook so high.

      • by Anonymous Coward

        Now we just need to punish the people who valuated Facebook so high.

        You mean like the hundreds of millions of users it has and who still value the service to the point where major established companies are bending over backwards to fit Facebook into their marketing schemes? Huh. Weird, I can't tell if that's more misanthropic or solipsistic of you.

        • Where tangible things of real value are commodities, and not just hype.

        • by ranton (36917) on Wednesday May 29, 2013 @04:32PM (#43854135)

          Now we just need to punish the people who valuated Facebook so high.

          You mean like the hundreds of millions of users it has and who still value the service to the point where major established companies are bending over backwards to fit Facebook into their marketing schemes? Huh. Weird, I can't tell if that's more misanthropic or solipsistic of you.

          Are you being serious? Considering Facebook's stock started at $38 and is now $23, and it took less than a week to lose 25% of its value, the only people being misanthropic or solipsistic are the ones who thought Facebook was worth such as ridiculous P/E ratio in the first place. Or the people who took advantage of the more weak minded traders who wanted another get rich quick scheme by buying an IPO they just expected to double in value over the first week.

        • by X.25 (255792)

          You mean like the hundreds of millions of users it has and who still value the service to the point where major established companies are bending over backwards to fit Facebook into their marketing schemes? Huh. Weird, I can't tell if that's more misanthropic or solipsistic of you.

          Millions of flies can not be wrong either.

        • by Alioth (221270)

          > solipsistic

          You keep using that word. It does not mean what you think it means.

      • Now we just need to punish the people who valuated Facebook so high.

        Why? I could go out on the street and sell lemonade for $100 a cup. With enough work I could probably find a famous person or two to tell the world that the lemonade is so good it's totally worth it. How is it my fault if there are enough idiots out there for me to make a profit?

        • by phorm (591458)

          Maybe if the lemons were mixed with certain illicit substances.
          Heck, that would probably make it very popular in Hollywood...

        • Because your lemonade sales aren't stricty regulated. Unlike speculative "investments".

          The whole IPO was clearly a "bigger idiot" scam. $10M is a joke. Fines (plural, there were many culpable parties) should be an order of magnitude bigger than that.
      • by Score Whore (32328) on Wednesday May 29, 2013 @04:42PM (#43854223)

        The more fundamental problem was NASDAQs inability to carry the trades so that people who were interested in trading FB stock were entirely unable to receive market indicators of the value of the stock nor were they able to modify trades. It's known that trades were cancelled shortly after FB began trading yet due to the exchanges issues the trades were settled hours later regardless of the cancellation.

      • by mspohr (589790) on Wednesday May 29, 2013 @04:44PM (#43854241)

        "Now we just need to punish the people who valuated Facebook so high."

        I just don't understand this logic.
        In retrospect, Facebook was priced "high" but still had lots of greedy people clamoring to buy it at that price.
        Who should we punish?
        - The greedy people who thought they would make a killing by flipping the stock?
        or
        - The greedy people at Facebook who priced the IPO to maximize revenue?

        Nobody forced anyone to buy the stock. Nobody committed fraud by hiding material facts.
        This is just a clusterfuck of greedy people. NASDAQ did screw up and made it harder for the greedy buyers to get in or get out and make profits. NASDAQ should pay for these screwups... and $10 million is peanuts.
        I will enjoy watching all of these greedy people fight over money.

        • by dywolf (2673597)

          exactly.
          the stock market is not a zero risk game. they took a risk by valuing it higher than many people were saying was advisible.
          and in the end, the market did it thing, punished a lot of them, and then recovered with some very decent gains for people who saw the bubble that was coming and were patient enough to ride it out.

        • Nobody committed fraud by hiding material facts.

          Actually, that is exactly the stated problem [thedailybeast.com]; though, not surprisingly, Facebook denies any such thing. Reports came to light that information was selectively released in the days before the IPO and that the IPO was inappropriately priced based on that information.

      • by DarkOx (621550) on Wednesday May 29, 2013 @05:48PM (#43854751) Journal

        Now we just need to punish the people who valuated Facebook so high.

        Why? the market did that for you. The people who valued facebook that high at the end of the day are the ones who agreed to pay the $38 dollar IPO price. They now own shares worth ~$23.50. Isn't that punishment enough?

        It was mostly big institutional investors too, probably could not happened to a more deserving bunch.

    • by Anonymous Coward
      Why would the average person care if it was 10 dollars or 10 billion? They never see a dime of it even if they're share holders.

      The problem with big fines is that it goes to a government that has already displayed that they don't care about a tax payer's ROI... they just do whatever they want.

      Big fines don't make me feel better. It's just cash between one con artist to another con artist.
    • by game kid (805301)

      Well, this is the exchange that had Madoff as its chair. Draw your own concs.

    • by Impy the Impiuos Imp (442658) on Wednesday May 29, 2013 @05:09PM (#43854483) Journal

      > And people wonder why the average person hates the very idea of the stock market.

      The average person does not hate it. Just your own little moral online tribal society hates it, where you reinforce to each other statements about the awfulness of this or that vis-a-vis politics, in support of a meme-based amalgam of people looking for power themselves.

      • by johnjaydk (584895)

        The average person does not hate it. Just your own little moral online tribal society hates it, where you reinforce to each other statements about the awfulness of this or that vis-a-vis politics, in support of a meme-based amalgam of people looking for power themselves.

        I completely agree; it doesn't matter that some average yahoo hate the stock market. What matters is that most firms and investors now consider the stock market so rigged that it doesn't serves its original purpose. Therefore they no longe

    • by dywolf (2673597)

      no.

      the average ignorant person hates the idea of the stock market.
      the average intelligent person loves the idea of the stock market.

      the average intelligent person hates the winkwinknudgenudge slap on the wrist punishments of the people tasked with being its watchdogs.

    • by khallow (566160)

      And people wonder why the average person hates the very idea of the stock market.

      Because if stock markets didn't exist, then rich people wouldn't have a way to pay/bribe governments for services rendered. I imagine the average person doesn't hate so much the wealth that they've received from stock markets. It kind of makes their hate a bit meaningless.

  • Funny how the government can come down on a company when its the insiders that get screwed - Come n, joe q investor cant get hot IPOs like Facebook, its either employees and founders (which is OK) or big mega banks that set the deals up that end up getting the IPO shares and selling at the spiked post IPO price.

    • by the eric conspiracy (20178) on Wednesday May 29, 2013 @04:28PM (#43854071)

      It depends what you mean by Joe q investor, but it is possible for a lot of people.

      https://eresearch.fidelity.com/eresearch/ipo/ipocalendar.jhtml#eligibility [fidelity.com]

      But really you don't want to mess with that sort of thing. Sound investing isn't about gambling with hot ipos. It's about using sound principles of portfolio management, diversification and risk management, and keeping management costs down.

      http://online.wsj.com/article/SB10001424127887323475304578502973521526236.html [wsj.com]

      • by Pubstar (2525396)
        What if you buy the new hot ipo and then immediately short the stock?
        • Shorting involves borrowing some stock, selling it to a buyer then and in the future replacing the borrowed stock by buying it at a (hopefully) lower price. Your profit is the selling (current) price minus the lower future price.

           

        • by smellotron (1039250) on Wednesday May 29, 2013 @11:43PM (#43857201)

          What if you buy the new hot ipo and then immediately short the stock?

          "Buying the IPO" is just buying stock in the IPO auction. "Shorting" the stock means selling stock which you do not own. So if you buy the IPO and then immediately sell, you're not actually shorting it. This is high-risk day trading, and not an activity recommended for Joe Q. Investor. Not to mention that the high IPO price for FB seems to have been crafted to punish traders expecting an "IPO pop".

          Now, suppose you wanted to sell more than you initially bought. Then, the excess sell quantity actually is "short", and you must confirm the ability to borrow the stock from e.g. your broker or some other large institution. If you do not confirm the ability to borrow, then you are shorting "naked" which is not permitted. Because everyone is in this situation on IPO day, you will probably have a hard time finding someone to borrow from without paying out the nose for the "stock loan".

          • by Pubstar (2525396)
            Thanks for the info. Would mod you up, but since I already posted... Well hopefully a thanks for the info without being condensing will have to do.
  • The delays caused the investors to lose less money than they would have lost otherwise. Had things been happening at maximum speed people would have come to realize even sooner that facebook was wildly overvalued and the market correction would have driven the price even lower. Instead it only lost around half of its value on opening day.
    • by GodfatherofSoul (174979) on Wednesday May 29, 2013 @04:50PM (#43854295)

      Check out that tractor beam YouTube video. I don't understand the mechanics, but someone was dumping a lot of money into keeping that stock price up.

      • Re: (Score:3, Informative)

        by Swistak (899225)
        It's called underwriting - when stock goes public, it usually has one or more major banks as underwriters which are required to keep stock at certain price (not neceserilly a IPO price, limit can be lower). Company can go public without it, but most big IPOs have that option.
        It's a system designed to avoid "flops" and for more realistic IPO prices. If underwriter values stock to high they have to spend money buying that stock.
        Usually there's time and/or a value limit (so we'll prop up price fo x days, or
      • There is an exception under the US Securities laws against market manipulation that allow an IPO's underwriters to make a "stabilizing bid" (IPO price) to keep a stock from falling as a "market" is created for the new issuance. Needless to say they did not support the stock after the first day of trading :) http://www.investopedia.com/terms/s/stabilizingbid.asp [investopedia.com]
    • by steelfood (895457)

      No, you're thinking of the little guy who would've bought into the hype. The SEC is thinking of the institutional investors who put money into FB before the IPO who would've sold high on the hype (and still did, to a large extent).

    • The delays caused the investors to lose less money than they would have lost otherwise.

      The IPO was around $38, and I heard of friends who had buy market orders executed near $43. Certainly a bad decision on their part, but it seemed that the delays did have some price impact. Other organizations that had orders remain unacknowledged may have submitted additional orders to buy at a high price, without realizing that they were effectively going to get double-filled. Now, it's not NASDAQ's fault that my f

  • Why bother? (Score:2, Insightful)

    by Anonymous Coward

    A 10 million fine on the scale of these companies is NOTHING... the paperwork to pay it costs as much as the fine...

    Once they get to this 'too big to fail' state... any fine under a billion dollars is nothing. You're just wasting everyones time.
    Either correct the fine so that the company will notice and will change.. Or just ignore it.

    This half assed way of doing things we use right now is pointless.

    stop it.

    • Re:Why bother? (Score:5, Interesting)

      by tazan (652775) on Wednesday May 29, 2013 @05:01PM (#43854415)
      According to the article NASDAQ made 10.8 million profit by shorting Facebook in just one of their rule violations. So they aren't even getting fined as much as the profits they made violating the rules.
      • According to the article NASDAQ made 10.8 million profit by shorting Facebook in just one of their rule violations.

        Yeah, holy shit. No exchange should have trading accounts, least of all the listing exchange; that is a clear conflict of interest. Those profits should be disgorged.

    • Well it's not much, but would the government give the fine to the victims, or would they just spend it on stuff three years ago?

  • The question is how do you accurately value a company with an unproven business model and no clear profit lines? Also considering that this company has had a whole legion of predecessors who had the same idea, but failed for one reason or another to become profitable or sustainable.
    • Apparently, you just value them at whatever the hell they tell you to.

    • by tompaulco (629533)

      The question is how do you accurately value a company with an unproven business model and no clear profit lines? Also considering that this company has had a whole legion of predecessors who had the same idea, but failed for one reason or another to become profitable or sustainable.

      Take all the subscribers, assume 20% growth in subscribers per year, factor in for interest, compounded continuously. Then take the resultant number and multiply by zero.

      • Take all the subscribers, assume 20% growth in subscribers per year, factor in for interest, compounded continuously. Then take the resultant number and multiply by zero.

        Oh, multiply by zero. Our bad.

        - NASDAQ

    • by stymy (1223496)
      You don't accurately value them. That's why IPO's are risky, no one is sure if the price is good or not, so it's a win big, lose big kind of thing. However, keep in mind that the wealth of data Facebook collects is very valuable and useful in the age of Big Data.
    • The question is how do you accurately value a company with an unproven business model and no clear profit lines? Also considering that this company has had a whole legion of predecessors who had the same idea, but failed for one reason or another to become profitable or sustainable.

      Because this one has more ads and marketing crap bundled into it. Just my opinion.

  • by cnaumann (466328) on Wednesday May 29, 2013 @04:25PM (#43854043)

    Because when you average it all out, no one really lost anything.

  • by Opportunist (166417) on Wednesday May 29, 2013 @04:31PM (#43854125)

    We overvalued FB by some margin and then some, didn't realize we're essentially scryers looking into our crystal balls that display models that we built, for people like us, who believe these schemes to be true (and hence make them true, as long as petty things like market or reality don't butt in), we lost money because we're too dumb to realize our models have nothing to do with reality and once they hit reality they crumble.

    But it's all Nasdaq's fault for doing ... uh ... what exactly? Not allowing us to blow away our money fast enough? Because that's essentially the "mistake" Nasdaq made. But hey, maybe that's required for the scheme to work, because the only thing that would've kept FB share values up was money artificially pumped into it to inflate it.

    So yes, Nasdaq is to blame. They didn't let us play the market like we usually do, sue their pants off 'em!

    • by the eric conspiracy (20178) on Wednesday May 29, 2013 @04:34PM (#43854153)

      Wrong.

      The problem is that Nasdaq wasn't able to deliver trade confirmations to brokerage houses and institutional buyers. This caused these organizations to try to place multiple orders that they didn't actually want, and it contributed to price uncertainty in the market.

      • There was no price uncertainty whatsoever. Only the clueless thought it would go up. The naked short selling led to the problems. If the IPO had started around $28, there would not have been a problem. But, $38 was way too much, and it was an obvious short play before it started. When most of the trades where shorts, and there were few buyers, hell yeah, you are not going to get confirmation of a short sale until some buyer comes in, otherwise they would all be naked short sales.
        • When most of the trades where shorts, and there were few buyers, hell yeah, you are not going to get confirmation of a short sale until some buyer comes in, otherwise they would all be naked short sales.

          This demonstrates some solid misunderstanding of what happened on a technical level. Nobody sends trades to the exchange: they send orders. The exchange will acknowledge that orders are accepted by the system, and will send further acknowledgments if the orders execute. An acknowledgement should arrive

    • Nasdaq made explicit and implicit promises to many kinds of people. They failed to deliver. Even if damages are hard to evaluate, the SEC has to take some kind of action for that manifest failure. The courts are available for figuring out other details.

      While this affair is not going to get the SEC covered in laurels, doing nothing was never a reasonable option.

  • by Anonymous Coward

    Don't go public to begin with. Screw the idea of shareholders. Once you go down that road, you no longer "own" your company. You operate at the largesse of the shareholders, who are only interested in money. Money, in the long run, is the poorest of motivators for success.

  • by GodfatherofSoul (174979) on Wednesday May 29, 2013 @04:53PM (#43854323)

    Once they got in and started floating that insane value for Facebook pre IPO, it should've been obvious to investors that the fix was in. If you see GS jumping in on anything, think of it as a neon "Warning: anal rape ahead" sign. Unless, you're privy to the innards of the deal of course...

  • What I don't understand, is why would trading be different for Facebook than every other stock on the exchange? Don't they just add the symbol to the database and then it trades like everything else. The fact the only Facebook was glitched seems to imply either a very sloppy system for initializing the software with a new symbol or there was some sort of malfeasance being employed with just this stock.
    • When a symbol IPOs, the exchanges generally executes an "IPO cross" which tries to match as many orders as it can at a particular price, and then all executions during the cross execute at that price. So everyone jams in their bids/offers whether they be market or limit orders before the symbol starts trading, and the matching engine will calculate a price at which the most volume will be executed.

      Presumably what happened is the execution reports that were supposed to be sent back to the firms when the cros

    • This was covered by many sources (for instance, Computerworld [computerworld.com]). Apparently the process that failed was the Nasdaq IPO Cross [nasdaqtrader.com].
  • Why is it that whenever people talk about how this-or-that stock market action has "cost investors millions"? It's not like the money was lit on fire. It either never existed in the first place, or somebody won big off of somebody else's poor decisions. Isn't stock trading a zero-sum game by definition?

  • I've never understood the stock market and never will. It feels completely fake to me, like a real-money MMO. It's like a rigged game where most people get shit on and the elites get all the loot. Let's all pretend we're "buying" a part of a company! Maybe it was a good idea at one point, but it's just a big joke now.

Numeric stability is probably not all that important when you're guessing.

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