Facebook Stock Auction Hit by Nasdaq Software Bug

A major software problem may have significantly limited the number of people able to purchase Facebook stock when it first became publicly available on Friday, May 18, 2012.

Nasdaq has assumed total responsibility for the fiasco and says it will offer compensation to those negatively affected by it. By some estimates, the payouts could total as much as $13 million.

Nasdaq officials had planned carefully for the huge amount of trading that was expected when Facebook stock "went live".

The combination of the number of shares put up for sale and the asking price made it the third-biggest stock issue in American history.

Facebook Stock Auction at Heart of Problem

The problems emerged right at the moment the stock was to first become available for trading.

Nasdaq's computer systems were attempting to bring together all the people who had been allocated stock in the initial public offering with all the other people who had missed out there but still wanted to buy stock as soon as some was put up for sale.

In effect, the system was attempting to run millions of individual stock auctions simultaneously. Ideally, the entire auction process should have been completed in less than a second.

But during this brief moment new requests from would-be buyers were mistakenly allowed to feed into the system.

As a result, the ratio of buyers to sellers suddenly became skewed, sending the 'order matching' system into an operational loop as it tried to cope with this imbalance.

Officials eventually took manual control of the system, and the 'order matching' auction took place just under 20 minutes later.

During this delay, however, there were orders to buy or sell about 30 million shares of stock, though as many as half of them may not have been processed correctly. (Source: slashgear.com)

Nasdaq to Pay Out Millions

Nasdaq already had a fund of $3 million available to pay compensation for such errors. It also had some additional cash available because, while taking control of the system, officials were forced to trade some Facebook shares.

As many as 3,000,000 shares of Facebook may have been purchased in this way, generating more than $10 million for a special "error account". Nasdaq says it will use this cash for compensation of those harmed by the trading errors. (Source: bloomberg.com)