I’m tired of all the coverage of the Facebook IPO. Yet the IPO provides important lessons for investors, investment banks, the Nasdaq, and regulators concerned about the ability of the stock exchanges to handle high volume events.
As everyone is aware, the Nasdaq system could not keep up with the trading volume in Facebook shares on Friday morning.
Its first problem was inability to match the buy and sell orders it had prior to the open. So the opening of Facebook for trading was delayed.
But even after the open, the Nasdaq was not able to provide brokers with confirmations of whether orders had been filled or not for several hours.
The result was chaos for many investors, large and small, but particularly large investors, money-management firms, and hedge funds, who were left in the dark.
They may have placed a pre-open order for 50,000 shares at a limit of $42. They could not find out if their orders had been executed at all, and if so for how many shares, or at what price. (Partial fills are made if there are not enough sellers at the specified price, unless the order is placed as ‘all or none’).
Those who tried to enter sell orders to exit positions when the price began to fall, were denied by their own computer systems, which had not received purchase confirmations that they had any shares in their portfolios to sell. So they didn’t know if they owned shares or not.
Those who had placed limit orders at higher prices and then cancelled them, and entered new orders at a lower price, didn’t know if the cancelation had taken place, or if perhaps the two buy orders had both been executed. And so on.
Nasdaq is reported to be working with regulators on how it should implement procedures to adjust orders that were not properly executed, or were executed but not reported in a timely enough manner to allow investors to place subsequent buy or sell orders.
Morgan Stanley said Monday morning that it had a number of customers’ orders from Friday that had still not been confirmed.
Here’s why alarm bells should be ringing!
The 1987 crash was exacerbated by the inability of the NYSE to keep up with the trading volume. As I wrote in my 1999 book ‘Riding the Bear – How To Prosper in the Coming Bear Market’:
“Only much later did investors learn how close the entire financial system had come to total meltdown that day in 1987. Sell orders so swamped the trading floor prior to the open that the NYSE was unable to even get all thirty Dow stocks open for trading until two hours into the session.”
“By that time the Dow was shown to already be down 9 percent. As that brought in still more selling, trading in individual stocks were repeatedly halted through the day because at times there were no buyers at any price.”
“Telephone and computer systems were totally inadequate for the volume of calls from investors trying to get through to their brokers, while their brokers’ systems were also overloaded and they could get no information from the trading floor. The plunges were triggering margin calls and the floor brokers were simply selling margin positions out since they couldn’t get through with margin calls to investors for more cash.”
“I was told by a friend who was a long-time broker at Merrill Lynch, that he and many brokers simply abandoned their desks, went to lunch and stayed away, telling their secretaries to tell any clients who did get through that they were ‘in a strategy meeting and unavailable.’”
The investigations afterward resulted in the stock exchanges under-taking massive efforts to beef up their systems, soon assuring Congress, regulators, and investors that they would be able to handle many times any possible spike in volume in the future.
Friday’s problems with handling unusual volume in just one stock should be raising alarms about what could happen in the event of a more widespread volume event’.
Commodity Pressures Increase!
I provided a chart in my newspaper column two weeks ago, Plunging Commodity Prices Are Ominous For Stock Market! May 11, 2012, that showed how slowing demand for commodities has commodity prices plunging, which in the past has often been a bad omen for global economies and stock markets. eg. The CRB Commodity Index plunged 57% in 2008 and the S&P 500 plunged 57% in the 2008-2009 bear market. The CRB fell 15% in the summer of 2010 and the S&P 500 declined 15% in the summer correction in 2010. The CRB declined 19.5% last summer and the S&P 500 declined 21% in last summer’s correction.
Unlike the U.S. stock market the CRB did not completely recover from its decline of last summer, and now its back to the downside, down 11.5% so far from its high in February.
And on the subject of commodities, from Asia comes news that China’s demand for commodities has tailed off severely.
The Financial Times reported yesterday that Chinese users of thermal coal and iron ore are asking suppliers to defer shipments, and “in some cases defaulting on contracts, in the clearest sign yet of the country’s economic slowdown on the global commodities markets.”
FT went on to say, “Soft commodities such as soy bean and cotton have also seen Chinese commercial customers default in the last two weeks according to a trader at another global trading house.”
A chief executive of Samsung, the world’s largest producer of such products, says the company is worried about weakness in Chinese consumer spending, damped by government austerity measures. China is not only the world’s largest importer and user of commodities, but also the world’s largest internet, smartphone, and flat-panel market.
But commodities are also oversold short-term.
The plunge in commodities and gold since February, and in global stock markets since March, had them all oversold on the short-term charts as of last Friday, and probably due for at least a brief technical rally off those oversold levels.
I said a week ago I expected an oversold rally in stock markets last week. It didn’t happen, but is underway this week – well markets were up yesterday anyway.
Gold was also oversold short-term and had an impressive two-day rally Thursday and Friday. But is that all there will be to it? It was back down yesterday, and is down $8 an ounce this morning.
It’s pretty much the same thing with commodity prices including oil.
A number of Wall Street spokesmen were saying yesterday that the rally marked the end of the correction.
Perhaps, but I have to ask myself whether anything has changed other than the short-term oversold condition?
Have the economic slowdowns in Asia, Europe, and the U.S. suddenly shown signs of improving? Does the eurozone crisis appear to be improving?
As if in answer to those questions, the International Monetary Fund said this morning that Britain needs further monetary easing since further risks to the U.K. economy “are large and clearly tilted to the downside.”
And the OECD (Organization of Economic Cooperation and Development) cut its forecasts for the economies of the euro-zone again.
And in a surprise announcement, Fitch Ratings downgraded Japan’s credit rating and issued a negative outlook.
Don’t make me laugh any harder.
In another ‘don’t make me laugh any harder moment’, leaders of the G-8 nations emerged from their weekend summit in Washington, which was billed as having its focus on managing the eurozone crisis, to announce that they’d like Greece to remain in the eurozone – but had failed to agree on how to accomplish that, or how to calm the escalating crisis.
They did issue a joint statement saying more must be done to promote economic growth and job creation. Wow. How impressively insightful.
Subscribers to Street Smart Report: The new issue of the newsletter is in the subscribers’ area of the Street Smart Report website from Wednesday. And please stay tuned to the hotline for more potential portfolio changes!
To read my weekend newspaper column click here: This Is Crazy! Where Are The Promised Regulations- May 18, 2012
Images: Flickr (licence attribution)
About The Author
Sy Harding publishes the financial website www.StreetSmartReport.com and a free daily Internet blog at www.SyHardingblog.com. In 1999 he authored Riding The Bear – How To Prosper In the Coming Bear Market. His latest book is Beat the Market the Easy Way! – Proven Seasonal Strategies Double Market’s Performance!