
How Facebook’s IPO was bungled by Nasdaq’s computers - donohoe
http://qz.com/88987/sec-documents-show-how-nasdaqs-computers-bungled-facebooks-ipo/
======
joezydeco
Time to repost the awesome Nanex analysis of the IPO.

 _"How HFT Caused the Opening Delay, and Later Benefited at the Retail
Customer's Expense"_

<http://www.nanex.net/aqck/3099.html>

And a great quote from the update posted within:

 _"This also brings another example of the dangers of placing a blind,
mindless emphasis on speed above everything else. Algos reacting to prices
created by other algos reacting to prices created by still other algos.
Somewhere along the way, it has to start with a price based on economic
reality. But the algos at the bottom of the intelligence chain can't waste
precious milliseconds for that. They are built to simply react faster than the
other guys algos. Why? Because the other guy figured out how to go faster! We
don't need this in our markets. We need more intelligence."_

~~~
fleitz
There's an incredible difference between a trading strategy and an investing
strategy.

If you are on an investment timescale then really you should care less about
HFT and trading. What is the brain if not an 'algo'?

Most of the people who complain about 'algo' are traders who are now obsolete,
because computers can perform their 'technical analysis' faster and with less
emotion, than a human can. They claim they offer 'intelligence' but don't
offer much evidence that they actually do so.

~~~
joezydeco
If my investment strategy is "buy stocks and pray that some random HFT fuckup
in the next 40 years doesn't wipe out my entire life's savings along with
everyone else's", then the evidence is growing year by year that this strategy
is going to be a losing one.

~~~
minimax
You must have missed the part where the NASDAQ bug caused about $60MM in
losses whereas the subsequent price decline has destroyed $40B in market
capitalization. You can lose your shirt in the stock market, but that's been
true since long before we started using computers to trade equities.

~~~
joezydeco
No, I fully caught that part. I also understood why the NASDAQ computers
couldn't finish the cross: because HFT computers were hammering the NASDAQ
with cancel orders.

You don't DDOS a server and say "oh, the server has a bug."

And, to be perfectly honest, I have no sympathy for anyone that lost money on
the FB IPO. For once a company executed an IPO and got every cent on the
table. And I know that just infuriates every suit on Wall Street to no end,
which couldn't make me any happier.

~~~
Dylan16807
There _was_ a bug. A bug serious enough that you could trigger it with low
frequency trades. Every time the cross algorithm restarted it did so using
data that was 99% stale. This meant it didn't just need to find a few
milliseconds of stability, it had to wait until the average order rate went
low enough and stayed there for minutes. A relative handful of people changing
their orders a few times a minute would be enough to keep such an O(n^2)
algorithm occupied.

------
akozak
I don't fully understand why NASDAQ ends up taking a position on stocks ("It
just so happened that Nasdaq was shorting shares of Facebook at that time.").
If it's a mere exchange, should it just be matching buy and sell orders? When
does it take ownership of anything?

Is there a good explanation of how this works somewhere?

~~~
angli
My understanding is that they don't _usually_ end up with stocks, but their
handling of this specific situation created what amounted to a short position.

Essentially, the bug (whatever you want to call it is irrelevant from the
financial angle) meant a bunch of people wanted to sell facebook stock and
were unable to do it. They said that they were willing to sell at the current
going rate, which was $42.

NASDAQ was unable to process the orders, so they weren't able to process the
sales. The resolution they settled on was essentially becoming the other party
to the transaction: they would provide the FB shares to the (possibly
disgruntled) customers at the same price - as if nothing had gone wrong.

But, as this is happening, NASDAQ _doesn't actually have FB stock_ \- they
have to buy it on the market later. Like a normal short, they benefit if the
price goes down since they have to spend less to get back the shares. For
example, if FB went down $2, NASDAQ only has to pay $40 for the share, and
they make a $2 profit.

This is all a long-winded way of saying they didn't have a short in the
traditional sense, and in normal cases this doesn't happen, but it happened as
a result of this screwup.

~~~
gcb0
still does not explain "if i want to sell, the exchange should match me with
someone. they fail to match me with someone, but instead they buy my shares"

makes no sense. at all. unless exchange does not means what i think it means.
and they should pay sales tax for shares as they are selling/buying them as a
dealership buys and sells cars.

~~~
angli
No, exchange still means what you think it means. The issue they had is that a
bunch of orders got stuck in a queue somewhere and thus couldn't actually be
_exchanged_. This is all a question of how you deal with that. NASDAQ decided
not to just cancel the orders or execute them later but to provide them the
trade they "deserved"

Personally, I think that was the right decision, but it's your call.

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tantalor
Gripe: Block quotes should have _narrower_ margins than the body text, not
wider.

~~~
tzs
They should also actually be block quotes. Those aren't. They are images. I
can't think of a good reason for this, becaus the PDF they came from is one
that allows text selection and copying.

------
fourstar
And now the market has dictated its true value.

------
DigitalSea
I am tired of hearing this repeated excuse. When things don't go as expected
everyone looks to someone or something to point their fingers at and blame. I
seriously doubt this was a "server issue" and more of a deliberate delay to
benefit a certain few.

~~~
NelsonMinar
Do you have any evidence for this fraud accusation?

~~~
NelsonMinar
I guess not.

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downrightmike
yeah, sure "the servers" did it

