For nearly 20 minutes on the morning of Facebook Inc's trading debut last Friday, the line Nasdaq had opened up to keep traders informed about the social media company's $16 billion IPO had been mute. Well after the stock was supposed to have opened at 11 a.m. New York time, no one from Nasdaq was talking - and there was still no sign of trading.
Finally, at 11:28 a.m., an unidentified person announced that the shares would open in about 2 minutes. Nasdaq also said orders and cancellations were still being processed, according to several sources listening to the call.
Those crucial 20 minutes created confusion that turned into chaos over the next few hours as market makers - the brokers who quote bid and offer prices - struggled to figure out what was happening. They were rebuffed in their attempts to get Nasdaq to halt trading and sort out a growing number of problems.
A lack of communication and, some say, misinformation from Nasdaq may have been central to the failed debut of Facebook's shares. Market makers - crucial to the smooth operation of stock trading - were unsure about their exposure for hours. Investors were in the dark as to whether their trades had gone through, in some cases for days afterwards.
The turmoil caused the four big market-makers for Facebook's stock, Knight Capital Group, Citigroup's Automated Trading Desk, Citadel Securities, and UBS AG to lose around $115 million between them.
"There was very little if any communication from Nasdaq throughout the entire process," said Mark Turner, head of trading at Instinet, another market-maker based in New York. "As a matter of fact, we feel there was miscommunication."
Instinet said it also suffered a loss, though it wasn't specific other than to say it was significantly less than the $30-35 million reported by Knight.
The precise actions taken by Nasdaq officials last Friday are still unclear. Spokespeople for Nasdaq declined numerous requests for comment, referring Reuters to a status alert issued on Monday that outlined some of the problems encountered and some of the steps it took in an attempt to resolve them.
The Nasdaq call, led by Nasdaq Vice President Todd Golub, according to sources, was scheduled to last 2 hours from 10:15 a.m. to 12:15 p.m. to make sure that the exchange was keeping in close touch with the market. It is a normal event for a big IPO.
However, this call stretched into the late afternoon, as the most anticipated new U.S. stock offering in years turned into one of the ugliest.
The fallout from the events last Friday has become a continuing nightmare for Nasdaq OMX Group, which wooed the social media network for months and openly prides itself on its technology.
The result is another black eye for an exchange industry already suffering because investors not only lost confidence in the financial crisis but through the "flash crash" in May 2010 when $1 trillion in shareholder equity was temporarily wiped out in a matter of minutes.
Nasdaq CEO Bob Greifeld pumped his fist at the symbolic opening bell ceremony at Facebook's headquarters in Menlo Park, California next to Facebook CEO Mark Zuckerberg an hour-and-a-half before the company's stock was due to start trading. There were no outward signs then of the problems that were about to unfold back on Wall Street.
At 10:58 a.m., Nasdaq issued a notice that the Facebook opening would be delayed until 11:05 a.m. IPO delays of that nature are not unusual, especially with a massive launch like Facebook.
But then the revised start time passed without an opening trade on the stock. Minutes passed as traders waited. Nasdaq's next communication came at 11:13 a.m., when it noted in a terse emailed message to people who subscribe to the exchange's alerts that Nasdaq is "experiencing a delay in delivering the opening print in Facebook," with no other details.
Meanwhile, market-makers were receiving messages about their orders that later proved to be inaccurate. They say they were told during the period between 11:05 and 11:30 a.m., when the stock finally opened, that orders were still being taken for the opening price.
"Nasdaq representatives were stating right up until 11:29 that they were still accepting orders in Facebook for the open," said Turner of Instinet.
But that wasn't the case. Later, Turner said he was told that orders submitted up to 25 minutes before the opening were either canceled or not submitted into the marketplace until about 1:50 p.m. - more than two hours later. Other market makers received similar messages.
Behind the scenes, the massive order volume was overwhelming Nasdaq's systems.
Orders that were supposed to be processed in 3 milliseconds were taking 5 milliseconds, said one person familiar with exchange operations. This proved to be a major problem: In the extra two milliseconds new orders flooded in, thwarting the system's ability to establish an opening price for the stock and leading to a backup in unprocessed orders.
"This is starting to get bizarre," Wayne Kaufman, an equity market strategist at brokerage John Thomas Financial, said from the firm's trading floor on Wall Street, around 11:15 a.m.
Finally, the decision was made to put through a fix to the systems problem and get the stock trading. That move to a secondary matching engine used the order book as it appeared at 11:11 a.m. - but this meant new orders and changes in orders that came in later did not show up in the opening price. A matching engine is a computer that pairs bids and offers to complete trades.
Eric Noll, Nasdaq's head of transaction services, said in a statement earlier this week that the fix instead led to 2-1/2 hours of uncertainty during which brokers were unable to see the results of their trades.
The stock opened at 11:30:09 a.m. at $42.05 a share. An investor looking at a quote screen might have thought the trouble had ended there. In reality, the problems were about to worsen.
After initially heading to a high of $45, the stock soon began to plunge towards its issue price at $38. Lead underwriter Morgan Stanley stepped in to defend the stock while some others - unsure whether their orders had been processed or not - backed away from trading or decided to sell.
If confidence is undermined at the open, people "pull back because their orders are essentially going into a black hole," said former Nasdaq Vice Chairman David Weild.
Clients were telling their brokers they had not received confirmation of orders - which normally come through in seconds.
"Multiple market makers called Nasdaq and asked them to halt the stock and said, 'You have a problem and it's getting worse,' and their response was, 'The stock is trading normally,'" said an executive at one market-maker.
It is unclear who would have the authority to halt the stock. Nasdaq would not comment on whether it considered such a move.
For market-makers, the chaos was particularly problematic because they didn't know what they and their clients owned, and at what price.
"Should I be selling stock, should I be buying? And what's my price point?" said another official at a market-making firm. "You just don't know, so you were in effect flying blind until 2 o'clock."
The Nasdaq call had been a one-sided affair with the market makers apparently placed on mute by Nasdaq throughout. In a sign of how desperate the market makers were getting, they even attempted to ask questions which were probably never heard, said Turner, who called the information flow "anemic at best."
Nasdaq was telling call participants with questions to call the transaction services line. Some calls were not answered, and those who had their calls answered encountered delays of 45 minutes to an hour, the market-makers said.
Nasdaq posted few status updates. Shortly before noon the exchange said in an email it was investigating the delivery of trade execution messages. An hour later, it said it was still working on those issues.
Investors weren't sure if their orders had been filled, prompting some to cancel. That led to losses for market makers who have also, in many cases, compensated their clients for losses on delayed trades.
Finally, at 1:47 p.m. Nasdaq said it would electronically process all orders that were supposed to have been done at the opening price at 11:30 a.m.
That meant that more than 12 million Facebook shares traded between 1:49 p.m. and 1:51 p.m., one of the busiest periods for the stock that day, according to Thomson Reuters data.
But market participants say these trades, according to time-and-sales data, did not appear to be executed at the opening price of $42.05. Instead they were recorded at the then prevailing lower price.
"Those trades that came across at 1:50 should have had an indicator on them called a late sale - in other words, these are not trades that just happened, these happened two hours ago," said Joe Saluzzi, co-head of trading at Themis Trading in Chatham, New Jersey.
The barrage of orders added to selling pressure as it created the perception that a lot of investors were still trying to get out of the stock.
The stock wobbled around $40 a share for another hour when more sellers came in, dropping the price to near the $38 issue price - where it spent several agonizing minutes as lead underwriter Morgan Stanley defended that level. Facebook's shares closed that day at $38.23, but have since slumped and ended this Friday at $31.91.
The problems from Facebook's debut prompted Nasdaq to say on Monday that it was changing its IPO procedures, and would use the software it currently runs for its regular opening and closing numbers for future IPOs, rather than the software in place during Facebook's market launch.
That may not be enough for traders who feel burned.
Or, as one market-maker put it: "Why didn't you just halt the stock?"