Facebook’s billion dollar IPO didn’t just leave a lot of investors frustrated, it also left NASDAQ under the glare of a US Securities and Exchange Commission investigation, which has culminated in a $10m penalty. The fine comes as the SEC deems that NASDAQ ill-prepared for the Facebook floatation, not taking into account the likely demand by investors, and leading to significant disruptions on the day.
“Exchanges have an obligation to ensure that their systems, processes, and contingency planning are robust and adequate to manage an IPO without disruption to the market. According to the SEC’s order instituting settled administrative proceedings, despite widespread anticipation that the Facebook IPO would be among the largest in history with huge numbers of investors participating, a design limitation in NASDAQ’s system to match IPO buy and sell orders caused disruptions to the Facebook IPO. NASDAQ then made a series of ill-fated decisions that led to the rules violations” SEC
As the SEC sees it, NASDAQ was fully aware of the flaw in its market code before the IPO, but a high-level meeting saw executives decide to go ahead nonetheless. That’s despite actually addressing it being the simple matter of “removing a few lines of code” the SEC highlights.
The result was in excess of 30,000 Facebook stock orders frozen in limbo in NASDAQ’s computer systems, with the instructions lingering for more than two hours whereas they would normally be acted on immediately: either with a purchase or a cancellation.
NASDAQ subsequently admitted that it was “humbly embarrassed” by the goof, with executives later conceding that “in retrospect it was incorrect” for the exchange to go ahead with the IPO. A knock-on effect saw sales of shares in other companies, such as Zynga, delayed as well.
“This action against NASDAQ tells the tale of how poorly designed systems and hasty decision-making not only disrupted one of the largest IPOs in history, but produced serious and pervasive violations of fundamental rules governing our markets” George S. Canellos, Co-Director, Division of Enforcement, SEC
According to the investigation, NASDAQ compounded the mistakes by then shorting Facebook stock using an unauthorized error account, making a profit of $10.8m in the process. In total there were at least five rule transgressions, the SEC concludes.
The $10m penalty imposed is the largest ever against an exchange, and reflects the severity of the blunder, the SEC says. NASDAQ has agreed to pay it, though is yet to make any other comment.