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Facebook trading debut disappoints investors

An expected surge in Facebook shares fizzles. Glitches in trading don't help.

May 19, 2012|By Andrew Tangel
  • A woman peers into the window at the Nasdaq Stock Market in New York as trading begins in Facebook shares.
A woman peers into the window at the Nasdaq Stock Market in New York as trading… (Carolyn Cole, Los Angeles…)

NEW YORK — First it popped, then it flopped.

Facebook Inc.'s much-hyped debut on Wall Street was an event watched around the world. The social network's initial public offering valued it at $104 billion — more than market stalwarts such as McDonald's Corp. and Inc.

The opening Friday seemed as if Facebook was destined for a big market surge, and the stock vaulted for a split second to $45. Then the surge evaporated and shares fell back to their IPO price of $38.

Just 15 minutes after the stock opened for trading, the problems really began. Brokerages complained that they weren't getting confirmation that trades were going through, leaving investors in the dark as to whether they owned or didn't own shares.

The Nasdaq Stock Market, which won a hard-fought battle to secure the Facebook listing, warned that there were glitches in executing trades. It forced some investors to wait more than two hours to see if their orders went through.

"It's pretty bad," said one agitated trader at a large Wall Street brokerage, whose retail customers wanted to know if they had bought into what could have been a large pop in Facebook's price. "It didn't work like it should."

Adding to the confusion was that the Nasdaq delayed the open by two hours to guarantee an orderly launch for such a high-profile company. The exchange even held an hourlong conference call with brokerages and banks to keep them informed.

But traders said it didn't help.

Andrew Frankel, co-president of the brokerage Stuart Frankel & Co., said many traders "backed away from trading Facebook because Nasdaq had such system issues."

The problems caught the attention of the Securities and Exchange Commission, which said it would review what happened at Nasdaq. And the exchange also said it was looking into the matter.

But that was little consolation to investors who wanted to get a piece of the social networking juggernaut.

Many on Wall Street were hoping for a big first-day pop like with other recent tech IPOs, including LinkedIn Corp., Groupon Inc. and Yelp Inc. Facebook marked its maiden day as a public company up only 0.61%

As investor enthusiasm fizzled, the syndicate of Facebook's underwriters led by Morgan Stanley rushed in to keep the stock from falling below the IPO price — potentially a major embarrassment, especially with the largest tech IPO in U.S. history.

The big banks bought into a wave of selling as a way to prevent their customers from suffering big losses. Such propping up by underwriters happens in about one-third of IPOs, according to Jay Ritter, a finance professor at the University of Florida and an expert in IPOs.

"The underwriters were big buyers, which is not how this is supposed to work," said Larry Tabb, chief executive of market research firm TABB Group.

Tabb said Nasdaq's glitches could threaten the exchange's reputation as the premiere platform to list big blue-chip technology companies. He said that probably would benefit NYSE Euronext — which operates the New York Stock Exchange — the next time a big name goes public.

Nasdaq spokesmen did not respond to multiple email messages and phone calls Friday.

The IPO was still noteworthy in other ways. Facebook generated trading volume of about 580 million shares, more than for any IPO in history. The record was previously held by General Motors Co.'s in 2010, which generated 450 million trades.

Retail investors also dived into the stock. TDAmeritrade, for example, said trading in Facebook accounted for 22% of the largest online retail broker's volume Friday.

But in the end, Facebook shares gained only 23 cents to close at $38.23. The average IPO pops 10% to 15%, but the majority "start trading very close to the offer price," said Ritter, the IPO expert.

"It's a disaster for the speculators who were hoping to make a quick buck," said Ritter, who counted himself among them after he purchased 400 shares in his brokerage account. "But from the point of view of the company, this is the way IPOs should work."

Despite all the breathless media attention to Facebook's IPO, not everyone on Wall Street was caught up in the hubbub.

Ted Weisberg, a longtime NYSE floor trader whom some call the Mayor of Wall Street, said many of his seasoned clients wanted to wait and see how Facebook performed before investing.

With its IPO, he said, Facebook become "just another stock."

"History seems to remind us that when it looks too good to be true, it usually is," said Weisberg, who is president of Seaport Securities. "It's very hard for any stock to live up to the hyped expectation."

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