Monday, May 21, 2012

Equity Trader Alert #2012 - 20
Post-Mortem for NASDAQ issues related to the Facebook Inc. (FB) IPO Cross on Friday, May 18, 2012

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Post-Mortem for NASDAQ issues related to the Facebook Inc. (FB) IPO Cross on Friday, May 18, 2012

At 11:05:10 AM on Friday, May 18, 2012, NASDAQ attempted to conclude the quoting period, execute the IPO Cross and print the opening trade to the tape for the Facebook Inc. (FB) IPO. Initiating this procedure instructed the IPO Cross application to run its final calculation to match buy and sell interest and then print the opening trade to the tape. As a protection to ensure the integrity of the IPO process, the system is designed to recalculate the IPO auction if the matching engine’s view of the auction book has changed between the time of the final calculation and the printing of the opening trade.

After the calculation of the FB IPO Cross was completed, but before printing the opening trade, additional order modifications were received by the system, changing the auction order book. As designed, the system recalculated the IPO auction to factor in the new book state. Again, changes were received before the IPO cross could print the opening trade, which resulted in additional re-calculations. This condition persisted, resulting in further delay of the opening print.

At 11:30:09, NASDAQ cut-over to a secondary instance of the matching engine. This allowed NASDAQ to complete the IPO cross, print the opening trade of 75.7M shares @ $42.00 to the tape, and open continuous trading in Facebook. However, switching matching engines resulted in unintended consequences.

  • At the time of the cut-over, the system’s view of the IPO Cross order book was 11:11:00 AM. As a result, orders or order modifications for FB that had been entered into the system between 11:11:00 and 11:30:09 were ineligible to participate in the IPO Cross.
  • The process resulted in a momentary order port disconnect for some customers. Impacted customers were able to reconnect immediately.
  • All execution reports for shares traded in the IPO cross as well as cancellations for marketable orders entered between 11:11:00 and 11:30:09 were not distributed by the system.
  • When continuous trading began, NASDAQ’s quote in symbol FB was crossed on both the SIP (marked as non-firm) and proprietary data feeds.
  • Additionally, members submitting pegged orders to the exchange may have experienced delayed acknowledgements and executions.

At 11:37:21, Zynga Inc. (ZNGA) was halted correctly due to a single stock circuit breaker. However, the system’s view of the auction state was still not current. The application recovered and released ZNGA for trading at 12:27:50. Executions from this halt cross were not disseminated as they were similarly impacted by the prior issue.

At 12:29:40, ZNGA again halted correctly due to a second single stock circuit breaker. As before, ZNGA was unable to open as expected at 12:34:40. At 13:35:00, NASDAQ manually released ZNGA from this halted state without the expected 5 minute quoting period and auction.

At 13:50:00, NASDAQ delivered all outstanding execution and cancel messages to members for their Facebook IPO cross orders, and executions from the ZNGA halt cross. NASDAQ’s quote in FB resolved appropriately on both the SIP and proprietary data feeds at this time. Additionally, some RASH and FIX orders with a time-in-force greater than “Immediate or Cancel” that had been submitted between 11:11:00 and 11:30:09 for the IPO Cross were re-entered into the continuous market by the RASH engine.

At 16:00:00, the NASDAQ closing cross operated normally in all symbols. FB crossed 2,545,244 shares at $38.37.

Moving Forward

NASDAQ has modified its IPO and Halt Cross application to no longer accept cross-eligible order modifications after the auction’s final calculation has begun and before the trade is printed to the tape. This will prevent the race condition experienced Friday from re-occurring.

All NASDAQ systems are operating normally.

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