NEW YORK (Reuters): Claims by four of Wall Street's main market makers against
Nasdaq over
Facebook's
botched IPO are likely to exceed $100 million, as they and other
traders continue to deal with thousands of problems with customer
orders.
A technical glitch delayed the social networking
company's market debut by 30 minutes on Friday and many client orders
were delayed, giving some investors and traders significant losses as
the stock price dropped. The exchange operator is facing lawsuits from
investors and threats of legal action from brokers.
Four of the top market makers in the Facebook IPO -- Knight Capital, Citadel Securities,
UBS AG
and Citi's Automated Trading Desk -- collectively have probably lost
more than $100 million from problems arising from the deal, said a
senior executive at one of the firms.
Knight and Citadel are each
claiming losses of $30 million to $35 million, potentially overwhelming
a $13 million fund the exchange set up to deal with potential claims.
Nasdaq
also has to contend with the outside prospect that it could lose the
Facebook listing entirely after having just obtained it.
Facebook
shares ended regular trading on Thursday up 3.2 percent at $33.03,
about $5 short of their offering price. Action on the stock, however,
has essentially become secondary to the fallout from the IPO -- its
price, its size, its execution and questions about selective disclosure
of its financial prospects.
Regulators including the
U.S.
Securities and Exchange Commission, the
Financial Industry Regulatory
Authority and
Massachusetts Secretary of the Commonwealth William Galvin
are now looking into how the IPO was handled. The
U.S. Senate Banking
Committee is also reviewing the matter.
BROKERS UP IN ARMS
Advisers
familiar with the situation said many investors are now finding out,
nearly a week after the fact, that their orders were not executed at the
prices they thought.
Fidelity, in a statement, said it was
working with regulators and market makers on its clients' issues "and we
will continue to do so until we are confident that Nasdaq has done
everything it can to mitigate the impact to our customers."
Morgan Stanley
is also still tending to trade orders placed by brokerage customers on
Friday, two people familiar with the situation said. Nasdaq has said all
orders were returned by 1:50 p.m. EDT last Friday, but a
Morgan Stanley
Smith Barney source said it did not get trade information in a
"systemic, orderly way.
Late Thursday, the company held a call
with its brokers and told them adjustments would be made to thousands of
trades so that no limit orders would be filled at more than $43 a share
for stock from the IPO day, a person familiar with the call said.
While
brokerages may have received confirmation of trades made on Friday,
many were still handling customer disputes over what price they received
on the trades, officials said.
The question is "who is going to
eat the cost" of compensating those investors, said Alan Haft, a
financial adviser with California-based
Kings Point Capital LLC, which has $200 million in assets.
One prominent plaintiffs lawyer said what happened with Facebook was reminiscent of the dot-com bubble.
"This
is just another spin on the same game of unfair treatment of individual
investors," said Stanley Bernstein of Bernstein Liebhard. He chaired
the plaintiffs' committee in an IPO class-action suit challenging the
role of investment banks in more than 300
IPOs between 1998 and 2000.
The litigation ended in a $586 million settlement in favor of the
plaintiffs.
MARKET MAKERS LOOM
The claims by market makers Knight and Citadel could end up dwarfing some of the brokerage issues, though.
"They
are certainly facing the specter of some significant lawsuits if this
pool is not enough," a source familiar with Knight's situation said of
the Nasdaq claims pool.
Citadel has sent its losses to Nasdaq for
potential compensation, a source familiar with the matter said.
Citadel's hedge fund was not affected.
The head of trading at
Instinet said it still had no idea when Nasdaq would respond to requests
for accommodation -- essentially, compensation for the order problems
-- or if those requests would be honored.
"Were gonna be looking
at a loss on our books" if Nasdaq does not honor the requests, Mark
Turner said. "We basically made most of our clients whole because Nasdaq
told us to go through the process and file for accommodation. If Nasdaq
does not accommodate us we're going to end up taking a loss."
"I
don't know that I want to put a dollar amount on that but it's not
nearly as significant as Knight's ($30-$35 million)," he said.
Citadel
and Knight, as market makers to the Nasdaq, honor their clients' buy,
sell and cancellation orders. The orders are supposed to be processed by
the exchange within milliseconds, but there was a nearly two-hour delay
in processing Facebook orders at the Nasdaq.
During that time,
market makers had no idea where their orders stood. And in reality, the
price clients bought or sold at was sometimes different than the price
they actually got.
For example, Facebook shares began trading
with an opening cross price - the first price at which those not in on
the IPO could buy or sell - of $42 per share. If an order to sell 10,000
shares at $42 went in at that time, but wasn't filled until later in
the day when shares were trading at around $39, a market maker like
Citadel or Knight would make up the difference - in this case, at a cost
of $30,000.
FEWER PROBLEMS ELSEWHERE
Several analysts who
cover exchanges said Nasdaq's legal liability should be limited,
though. According to the analysts, securities rules give Nasdaq wide
discretion in determining what, if any, compensation it should pay to
customers who claim that they suffered losses due to trading execution.
Under
exchange rules, Nasdaq's liability regarding client losses from certain
trading issues is limited to $3 million a month. Market makers will be
arguing that Nasdaq was so grossly negligent that its actions during the
IPO opening override the limits, said a source with knowledge of
Knight's situation.
Other firms said they did not have similar problems to those of Knight, raising questions about the scope of the losses.
"The problems were where people were trying to cancel orders; we didn't have that," said Peter Boockvar, equity strategist at
Miller Tabak & Co in New York. "Because we didn't have a problem doesn't mean there weren't problems."
E*Trade Financial Corp said its market making operations realized losses of "well under a million dollars."
Charles Schwab Corp
had a "small number" of the "tens of thousands of clients" who traded
Facebook whose issues still have not been resolved, a spokesman said.
"Each one requires some analysis to resolve, which can be time
consuming."
Shares of Nasdaq fell 1 cent to $21.80 on Thursday.
As of Thursday's close the stock was down 5.2 percent from its last
close before the Facebook debacle. Over the same period
NYSE Euronext is down just 0.1 percent.
The slide in the shares is adding to the pressure on Nasdaq
Chief Executive Robert Greifeld, who defended the exchange's performance at its annual meeting last Tuesday.
By Mark Hulbert, MarketWatch
May 25, 2012, 12:02 a.m.
Facebook’s stock should trade for $13.80
Commentary: Here’s a fair-price calculation for Facebook
CHAPEL HILL, N.C. (MarketWatch) — Well, then, what should be the price of Facebook’s stock?
Rather than endlessly rehashing the events that have taken place over
the last week, it is this question that investors should be asking.
Surprisingly, however, few are doing so.
And yet, courtesy of a just-released study, calculating a fair price for
Facebook’s stock isn’t as difficult as it might otherwise seem.
The study is entitled “Post-IPO Employment and Revenue Growth for U.S.
IPOs, June 1996–2010.” Its authors are Jay Ritter, a finance professor
at the University of Florida, and two researchers at the University of
California, Davis: Martin Kenney, a professor in the Department of Human
and Community Development, and Donald Patton, a research associate in
that same department. (
Click here to read a copy of their study.
)
The researchers found that the revenue of the average company going
public between 1996 and 2010 grew by 212% over the five years after its
IPO. Assuming Facebook’s revenue grows just as fast, and given that the
company’s latest-year revenue was $3.71 billion, its annual revenue in
five years’ time will be $11.58 billion.
NYSE, Nasdaq face off for Facebook
After the fumbled IPO for Facebook, the NYSE is renewing efforts
to lure more stock listings away from its rival, Nasdaq, Photo:
AFP/Getty Images.
Since Facebook
FB
+3.22%
is most often compared to Google
GOOG
-0.95%
, let’s assume that its price-to-sales ratio in five years will be just
as high as Google’s is currently: 5.51-to-1. You could argue that this
is an overly generous assumption, of course. But it nevertheless means
Facebook’s market cap in five years will be just $63.8 billion — 30%
less than where it stands today.
Assuming that the total number of its shares stays constant, that works
out to a price per share of just $23.26 — in contrast to its recent
closing price of $33.03.
Ouch.
Actually, however, the news is even worse: No one is going to invest in
Facebook shares today if its price will be 30% lower in five years. So,
in order to entice someone to invest in it today, Facebook needs to
offer a handsome return. Assuming that its five-year return is equal to
the stock market’s long-term average return of 11% annualized, Facebook
shares currently would need to be trading at just $13.80.
Double ouch.
Don’t like that answer? Try focusing on earnings rather than sales, and
you get only a marginally different result. Assuming its profit margin
stays constant (instead of falling as it could very well do as it
grows), assuming its P/E ratio in five years will be just as high as
Google’s is today, and assuming that its stock will produce a five-year
return of 11% annualized, Facebook’s stock today should be just $16.66.
How can Facebook investors wriggle out from underneath the awful picture
these calculations paint? By assuming that its revenue and
profitability will grow faster than the average IPO between 1996 and
2010 — and not just by a little bit, either, but a whole lot faster.
Of course, it’s always possible that Facebook will be able to pull that off.
But, as Professor Ritter pointed out to me earlier this week, “the
bigger a company gets, the harder it is to maintain percentage growth.”
And Facebook is already huge — larger, in fact, than all but 47 other
publicly traded companies in the U.S.
So my back-of-the-envelope calculations for this column could very well be too optimistic rather than too pessimistic.
Given all this, Ritter said that a market cap “of $63 billion ... five years from now seems like a very reasonable scenario.”
Mark Hulbert is the founder of Hulbert Financial
Digest in Annandale, Va. He has been tracking the advice of more than
160 financial newsletters since 1980.
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