Did a Stuck Quote Prevent a Facebook Opening Day Pop? | Hacker News Reader

Did a Stuck Quote Prevent a Facebook Opening Day Pop?

nanex.net

30 pointspldpld18 comments

"The economic and psychological costs stemming from Facebook not getting the traditional opening day pop are impossible to measure."

Are shareholders now entitled to a reward for going public?

Opening day is over. FB is trading well below the IPO price, let alone the high. Nobody can blame that on opening day glitches.

That means that the market would have clearly been more wrong to give it an opening-day "pop".

No, but they should have a stable exchange with which to go public. I'm not an economist, but to me it makes sense that factors such as confidence would greatly affect the price of a stock, not just in the short term. The price of a company's stock isn't just representative of its value - all the trading and expected trading of that stock plays a factor.

You could argue that it isn't a good system because it places less value on the companies being traded and more on the effects of trading itself, but within the current system I think people have a right to complain about a poorly-executed IPO.

See my comment above. If you assume that the underlying value of Facebook hasn't changed in the last week (a reasonable assumption - remember, we're dealing with the underlying value of the company, not the value of the stock on any given day), then there would be no reason for a bump to occur on the first day of trading except that the stock was incorrectly priced.

The reason that a 'bump' occurs is that money is being left at the table - ideally, stocks should exhibit no bump, because that means that the company has priced their stock correctly. Any bump means that traders are reaping the profit of the increase in the stock's value, and that profit is what the company was seeking to gain by going public.

Right, and I agree that the underlying value of FBComp hasn't changed. But that variability in the correctness of pricing of a stock is part of the game, is it not? As is the mis-estimation of a company's "true worth" by investors. If the problems with NASDAQ weren't present, and there was a first day bump as expected, I could see that instilling confidence in investors, driving demand for the stocks. Hence nanex's strongly worded quote about ripple effects. Do you disagree with that?

Ultimately we'll never know what would have happened, but the negative ripple effects seem plausible.

There is an argument that the IPO buyers from the roadshow deserve a premium for buying in bulk at a predetermined price before they have the full information of the open market.

Exactly. Let's assume that Day 0 = day of IPO, and Day -1 = the day before the IPO. Let's assume that the (unobserved) value of the stock on Day -1 is the 'true' underlying value of the stock.

The only way that a glitch on opening day would have a permanent affect on the stock price is if the stock price on Day n (for all n > 1) is conditionally independent of the price on Day -1 given the price on Day 0. In other words, the best predictor of tomorrow's price is today's price, and yesterday's price adds no new information.

This is a reasonable assumption, but if you believe that, it means you also believe that stock prices are essentially a random walk, in which case there is never any convergence to the true underlying value, even if the price starts at that true value (which it may not!)

Let's assume that stocks are not a random walk and are some reflection of the underlying value of the company (however you define that).

Even if there had been a glitch, on the first day, as soon as the real quotes start getting published and the information is symmetric all around, then the prices should start to approach the fundamental value, even if they don't converge.

If a week later, Facebook is still trading below the IPO price, we can assume either that the convergence process takes time (unlikely, given the volume of stock being traded) or that the underlying value of Facebook as a company has changed in the last week (unlikely, since there has been relatively little news about Facebook-the-company, as opposed to Facebook-the-stock).

Then why did BATS not reschedule their IPO again the next day? First impressions, regardless of how illogical they maybe, play a significant role in group behavior.

"Even if their had been a glitch?" Really? 3x the open was postponed, followed by 17 seconds of no quotes/trades on ANY stock from Nasdaq, followed by a crossed quote from same exchange, followed by 3+ hours of no quote in FB from the listed exchange.

Maybe it is due to an Anchoring bias http://en.wikipedia.org/wiki/Anchoring

That may slow the rate of convergence, but if it's strong enough to eliminate the convergence altogether, then that's equivalent to saying that stock prices are a random walk.

And the trading volumes are so high that I imagine we should expect convergence by now either way.

It's interesting what happened that day. At the opening of FB stock, Nasdaq tried to match about 75 million shares' worth of buys and asks--the 'opening cross'. However, if any one of those trades were updated, Nasdaq's engine was programmed to partially or completely throw out the cross and try again, resulting in an infinite loop since they couldn't calculate the cross fast enough every time there was an update. This is a pretty basic mistake in a system designed to process lots of events in real-time.

Nanex always likes to cast HFT as the villain of everything that goes wrong with the market--this is silly. HFT makes nothing but money for Nasdaq, and narrows spreads for investors. It was pretty clearly Nasdaq's job to handle the volume of information and not falter due to such a dumb mistake as other networks kept chugging along.

The same bug also affected trading in Zynga later that day on lower volume when trading closed and re-opened on that stock. This to my mind makes Nasdaq look guiltier. It's like they didn't even test what would happen handling a big cross under load.

"HFT makes nothing but money for Nasdaq, and narrows spreads for investors."

HFT makes a pile of money for Nasdaq. But narrows the spread?

Prove it.

Here's one of thousands of examples that shows otherwise.

http://www.youtube.com/watch?v=sDriNz8oAlc

Even if it does narrow spreads, it doesn't matter at the margin. If the spread is 5 pennies on average without HFT, and 1 penny with it, investors are losing out. HFT is charging them a penny to remove a penny of randomness. If someone offered you a a game where you could either:

A) flip nickles: heads you keep get the nickle, tails your opponent gets it B) flip pennies: heads you keep the penny 98% of the time, 2% of the time some other third party gets to keep it (an HFT outfit), your opponent gets it

Would you take A or B?

Why do non-HFT buyers or sellers deserve the spread any more than HFT buyers and sellers? They pay the same fees you do.

I guess you're a guy from Nanex.

I'm curious why you think I should have to "prove it" if willing buyers are trading with willing sellers on an exchange they chose to trade on. Seems pretty anti-market for a finance company.