Nasdaq to pay $10m fine over Facebook IPO

The bungling of Facebook’s initial public offering rocked the stock market and led to questions about security.
Spencer Platt/Getty Images/File 2012
The bungling of Facebook’s initial public offering rocked the stock market and led to questions about security.

Nasdaq’s parent company will pay the largest fine ever levied against an exchange for “poor systems and decision making” both before and after the bungled Facebook initial public offering.

The $10 million fine announced by the Securities and Exchange Commission on Wednesday helps the market operator move beyond an episode that hurt its reputation and damaged investor confidence in the stock market.

But the investigation of the incident by the SEC provides new and embarrassing details about the repeated blunders Nasdaq OMX Group executives made on the day of the IPO, May 18, 2012. The SEC also found that Nasdaq had violated own its rules on two occasions unrelated to Facebook in October 2011 and August 2012.


The head of the SEC’s market abuse unit, Daniel Hawke, said in a statement that there has been too much of a tendency to write off incidents like the Facebook IPO as “technical ‘glitches.’ ”

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“It’s the design of the systems and the response of exchange officials that cause us the most concern,” Hawke said.

Robert Greifeld, the chief executive of Nasdaq, wrote in an open letter on Wednesday that the company had put new safeguards in place. But he also defended the company’s overall performance.

“While we prepared extensively for the Facebook initial public offering, including thorough tests of our systems with member firms, the challenges we encountered that day were unprecedented,” Greifeld wrote.

The mishandled Facebook IPO was among a series of breakdowns that rocked US stock markets last year and led to questions about the soundness of an increasingly complex and computer-driven system.


In addition to the $10 million fine, Nasdaq has already agreed to pay $62 million to the brokers who lost money because their Facebook orders were improperly handled. Even that has not been enough to placate the firm that was hurt the most, UBS, which claims it lost $356 million because of Nasdaq’s errors. UBS has said it plans to seek more money from Nasdaq through arbitration.

The SEC’s findings could aggravate some of the remaining tensions over Nasdaq’s handling of the IPO because they reveal numerous previously unknown ways that executives fumbled the incident.

The problems began before the day of the IPO. Nasdaq did tests of its computer programs, but only on 40,000 orders, according to the SEC’s order. When it was time to begin the trading, at 11 a.m. on May 18, the system was overwhelmed by 496,000 orders.

The deluge of orders sent Nasdaq’s computer programs into a continuous loop that made it impossible to establish a correct opening price for Facebook stock. Nasdaq executives were immediately aware of the problems and summoned a “Code Blue” conference call, but they decided to proceed with the opening after making a few temporary fixes to the computer code and switching to an untested backup system, the SEC found.

Once Facebook started trading at $42, numerous brokers contacted Nasdaq to complain that they still did not know how many shares of Facebook they had actually purchased.


Just after noon, the chief executive of one broker wrote an e-mail to Greifeld.

“We are all trading blind,” the chief executive complained.

“Should you stop trading for some period of time so we can all catch up and actually understand our exposure?” he wrote, according to the SEC order.

At the time, Greifeld was headed back to New York from Facebook’s California headquarters, largely out of touch with his team. But Greifeld’s deputies decided not to stop trading. It was only at 1:50 p.m. that Nasdaq executives realized that they had failed to execute tens of thousands of orders that had been sent in. At that point, they caused more problems by selling many of these shares into the market, leading to a sharp drop in Facebook’s share price.

In addition to the problems with Facebook IPO, the SEC reported that the technology problems hit the stock of game-maker Zynga on the day of the Facebook IPO, causing big swings in the price of Zynga shares.

Programming errors were also the cause of the violations in October 2011 and August 2012, when Nasdaq mistakenly executed some customer orders below the publicly listed price.