A nice thing about IPOs is that they end: you work for months on pitching and executing a deal, you write hundreds of pages of documents, you embark on a roadshow with tiny planes and slovenly CEOs, you price the deal, you watch it trade on that first exciting day, and then you don’t do it any more. You and the company bask in the warm glow of a successful deal, and/or you avoid their phone calls in embarrassment about a bad deal, and then you give them some space before coming back and pitching them on the next piece of business.

Facebook is like the opposite: no bank involved in it can be in that much of a hurry to pitch the next piece of business, but the IPO itself will be relived over and over again for the rest of time. The latest is Citi’s angry letter to the SEC, responding to Nasdaq’s proposal to compensate market makers who lost money on the deal. Their preference is, uncharacteristically, to be compensated more, and they express that preference in the form of a litany of complaints about Nasdaq’s ineptitude and self-interest.

For instance:

Furthermore, while market participants were hemorrhaging money, Nasdaq made $10.8 million from trading out of a position in Facebook shares that it had taken during the commotion on May 18. Nasdaq’s explanation is that “[c]ancellations received [between 11:11:00 and 11:30:09 AM] were processed in real time, resulting in Nasdaq assuming in its error account the cancelled buy and sell positions.” Notably here is the fact that Nasdaq market makers were unable to do what Nasdaq had done. Market makers could not see their positions in real time, nor could their customers.

So, that does actually sound pretty unfair: Nasdaq got to fix its erroneous positions in near-real-time, but nobody else could find out their erroneous positions until much later. A while back we talked about this error account position and I guessed that Nasdaq was accidentally short about 3mm imaginary shares that it then had to buy back, effectively propping up the Facebook stock price. So that seems to have been right – Nasdaq counts 3,070,430 imaginary short shares. I imagined Nasdaq putting that imaginary short on at $42 in the opening cross, and then covering it the afternoon of the IPO at a price a little above $38, which seems to have been about right. And I speculated that that Nasdaq’s covering of its short helped – a bit – to prop up the price on that Friday.

But Citi’s letter suggests another, bigger thing that helped prop up the price. Here is Citi arguing that it should be compensated for phantom shares based on the Monday-morning VWAP rather than the Friday-afternoon price, because nobody could figure out how many shares they had until the weekend so any dumping of erroneous positions would have to occur on Monday:

At a minimum, Citi believes that the appropriate level of compensation should be measured using a volume weighted average price (VWAP) calculation for shares of Facebook between (a) the opening price on Monday, May 21, and (b) 12:00PM on Monday, May 21 …. The justification for this VWAP measurement is that, while Nasdaq purports to believe all member firms should have known their positions at exactly 1:50PM on Friday, May 18 (when Nasdaq first began sending back to its customers execution reports for the IPO Cross that occurred at 11:30AM), the reality is that the vast majority of Nasdaq’s customer base did not know their true position until well after the close of business on Friday, May 18. … Thus, Nasdaq knew that the majority of its customers were forced to carry significant positions over the weekend, and that they were not able to close those positions until trading began on Monday, May 21.

Here is a simplified description of the Facebook IPO mechanics:

  • The underwriters priced and sized the deal aggressively, increasing the likelihood that it would fall through the $38 IPO price.
  • On Friday, the first day of trading, the deal did in fact look likely to break through that price, forcing the underwriters to buy in ~2/3rds of their greenshoe – some $1.5bn worth of stock – at $38ish.
  • There was also a bit of other support – 3mm shares, or $120mm-ish worth of stock – from Nasdaq buying in its phantom short on Friday.
  • More notably, though, some chumps were stuck with billions of dollars of stock through the weekend – because they didn’t know they had it until late on Friday afternoon and couldn’t sell until Monday morning.
  • On Monday morning, after everyone had figured out what they had and decided to sell their unwanted shares – the stock opened at $36.53.
  • For Citi, which was left long stock over the weekend, this was unpleasant – which is why they want to get compensated based on the Monday morning price.
  • For others, it was even more unpleasant: UBS, for instance, seems to have accidentally gotten long several billion dollars worth of stock on Friday, and it’s unclear they were able to get out of all of it before Monday morning. Others – Knight Capital, etc. – were in the same boat. Presumably some of them dumped their erroneous shares on Friday afternoon; others, like Citi, did not.
  • For certain other people this was highly pleasant. Most notably, the underwriters, who would have probably eaten through their entire greenshoe (and then some?) if all of those shares had come for sale on Friday, instead got to wait until the IPO broke through its deal price in Monday’s opening cross. So they ended up buying in 1/3 of their greenshoe, some $800mm or so worth of stock, at $35ish on Monday, after giving up defending the $38 price, rather than having to buy those shares at $38ish on Friday afternoon when the deal was still defensible. This is how they made $100mm.

It’s not obvious how you put numbers to that, but for a ridiculous rough-and-ready calculation, consider that 107.5mm shares traded between 9:30 and noon (Citi’s proposed VWAP period) on Monday at a $34.6001 VWAP, versus 60.4mm shares during the same period on Tuesday. Assume that half of the 47mm “excess” shares sold on Monday morning would have been sold on Friday had their owners known they owned them and you get 23mm shares,* or very roughly the amount of greenshoe shares that the underwriters did not have to buy in on Friday afternoon – and could instead buy in at much lower prices on Monday morning.

In other words, Nasdaq’s errors very plausibly caused the entirety of the underwriters’ trading profits.

Now, no step of the above is particularly nefarious, but they combined to create a wealth transfer from market-making chumps like UBS and Citi to underwriters like Morgan Stanley and Goldman Sachs. Oh, and Citi. DealBook reports that Citi lost $20mm on Nasdaq’s errors and wants it back. They should at least credit the $2mm or so that they made on the greenshoe – 2.25% of those $100mm gains – against those losses.

Citigroup Assails Nasdaq Over Flawed Facebook I.P.O. [DealBook and pdf letter]

* Also, if you go along in that assumption, I have a punch in the face that you might be interested in. Still, surely Citi is right that some, probably significant, chunk of shares coming loose on Monday would have come loose on Friday had their owners known about them promptly.

32 comments (hidden for your protection)
Show all comments ↓

Comments (32)

  1. Posted by Wire | August 23, 2012 at 11:50 AM

    That was an absurdly long amount of time to make me wait for the first (and only) footnote.

  2. Posted by guest | August 23, 2012 at 12:00 PM

    17 pages is a bit excessive. Our letter read:

    Dear SEC,

    Yes, we do suck and we do have a fat, hyperactive finger, but we would still like compensation.

    Sincerely,
    UBS Equities

  3. Posted by Guest | August 23, 2012 at 12:02 PM

    C'mot 8 bullet poins? Who needs footnotes?

  4. Posted by pazzo83 | August 23, 2012 at 12:15 PM

    Citi, let us know if you need any help with the angry letter writing.

    - United Nations

  5. Posted by guest | August 23, 2012 at 12:23 PM

    "I'm as mad as hell, and I'm not going to take this anymore!"

  6. Posted by Rex Ryan, CFA | August 23, 2012 at 12:32 PM

    Seriously.

  7. Posted by That guy | August 23, 2012 at 12:57 PM

    I would be interested in this "punch in the face" that you speak of

  8. Posted by Quikding | August 23, 2012 at 1:43 PM

    god, UBS sucks

  9. Posted by WWTDD | August 23, 2012 at 4:38 PM

    You hit me in the ear. Why the ear?

    - Tyler Durden

  10. Posted by CLUNTEMUNFILI | August 24, 2012 at 4:20 AM

    Naar schatting 35 structuren producten ook of soms door de bles en bovendien managers verwachten dat de een positieve keer raming van de schade include gedaan. [url=http://oakleybrillennep.webnode.nl/]oakley holbrook[/url]
    Arizona’s Staatsbosbeheer divisie verzonden twee water offertes en daarna 15 brandweerwagens dat zou Een Mexico, dit ook vaak , maar ook verwelkomd het type aankomst van de DC -10 straalvliegtuig dat kan kan leggen eigen 100-meter-brede, mijl lange line met of zelfs water. [url=http://oakleybrillennep.webnode.nl/]oakley frogskin[/url]
    Fire bazen door gebruik te maken Nog te ontvangen Mexico en bijgevolg Arizona volgorde meer elite bemanning, motoren en lucht door de Community binnenzijde van Albuquerque, waar de directeur van Kenan Jaycox zei middelen geworden naderende volle capaciteit.
    http://oakleyzonnebrillen.webnode.nl/

  11. Posted by kim_jong_il | August 24, 2012 at 8:51 AM

    You're breaking my baws, Hans

  12. Posted by windows 7 download | August 24, 2012 at 2:31 PM

    The Microsoft office 2010 Compatibility Inspector has a simple scanner by which all of the helpful links and recommendations are updated from a connect to one central server location, which office 2010 professional makes the application easy and completely easy to work with. While using the it, the Microsoft office 2010 Compatibility Inspector can also generate automated summary and detailed reports you can use by users to avoid further problems.

  13. Posted by Cyncsissuct | August 26, 2012 at 11:18 PM

    you are really a good webmaster. The website loading speed is amazing. It kind of feels that you are doing any distinctive trick. Furthermore, The contents are masterpiece. you’ve done a wonderful activity on this subject! [url=http://pandorabraceletsalediscountap.blogspot.com]pandora cow charm[/url] pandora cow charm [url=http://andorajewelrystorelocationsonline.blogspot.com]stores that carry pandora charms[/url] stores that carry pandora charms [url=http://pandora-charms-customer.blogspot.com]pandora bracelet set[/url] pandora bracelet set

  14. Posted by Cyncsissuct | August 27, 2012 at 1:16 AM

    Terrific work! This is the type of info that should be shared around the net. Shame on the search engines for not positioning this post higher! Come on over and visit my site . Thanks =) [url=http://pandorajewelryretailersservice.blogspot.com]pandora charm bracelet retailers[/url] pandora charm bracelet retailers [url=http://store-pandora-jewelry.blogspot.com]sale on pandora bracelets[/url] sale on pandora bracelets [url=http://pandorasboxjewelrycustomer.blogspot.com]pandora jewelry charm bracelets[/url] pandora jewelry charm bracelets

  15. Posted by Tymnmeaby | August 28, 2012 at 9:28 AM

    Hey There. I discovered your weblog using msn. That is a really neatly written article. I will be sure to bookmark it and return to learn more of your helpful information. Thank you for the post. I will certainly comeback. [url=http://www.pandoracharmsbeadsuk.com/]pandora charms[/url]

  16. Posted by Enlinghig | August 28, 2012 at 9:56 AM

    Hi there, simply turned into aware of your weblog through Google, and located that it’s really informative. I???ê?èm gonna be careful for brussels. I???ê?èll be grateful in case you proceed this in future. Lots of folks will probably be benefited from your writing. Cheers! [url=http://cheappandoracharmsnice.blogspot.com]pandora charms free shipping[/url] pandora charms free shipping

  17. Posted by Cyncsissuct | August 29, 2012 at 1:39 AM

    Hey I know this is off topic but I was wondering if you knew of any widgets I could add to my blog that automatically tweet my newest twitter updates. I’ve been looking for a plug-in like this for quite some time and was hoping maybe you would have some experience with something like this. Please let me know if you run into anything. I truly enjoy reading your blog and I look forward to your new updates. [url=http://pandora-bracelet-salebuy.blogspot.com]pandora bracelet cost[/url] pandora bracelet cost [url=http://pandorajewelrysale-tap.blogspot.com]who carries pandora jewelry[/url] who carries pandora jewelry [url=http://pandorabracelets-buy.blogspot.com]pandora mom charm[/url] pandora mom charm

  18. Posted by DedoAmomymn | August 30, 2012 at 2:38 AM

    It is the best time to make some plans for the long run and it’s time to be happy. I’ve learn this publish and if I could I want to counsel you few fascinating issues or tips. Maybe you can write subsequent articles relating to this article. I desire to read even more issues approximately it! [url=http://www.swingers4life.net/member/blog_post_view.php?postId=84209]handbag mulberry[/url] .

  19. Posted by Enlinghig | August 30, 2012 at 11:27 PM

    Excellent post. I was checking continuously this weblog and I am inspired! Extremely helpful information particularly the remaining phase :) I handle such information a lot. I used to be seeking this particular info for a very long time. Thank you and good luck. [url=http://pandorabraceletsstoretap.blogspot.com]pandora charms where to buy[/url] pandora charms where to buy

  20. Posted by Sefetrelo | September 1, 2012 at 12:10 AM

    It is perfect time to make some plans for the future and it’s time to be happy. I have read this submit and if I could I desire to suggest you few fascinating issues or suggestions. Maybe you can write subsequent articles referring to this article. I want to read even more issues about it! [url=http://pandoracharmbraceletcheap.blogspot.com].[/url]

  21. Posted by Enlinghig | September 2, 2012 at 10:28 PM

    Wonderful goods from you, man. I have keep in mind your stuff previous to and you’re simply too fantastic. I really like what you have received right here, certainly like what you’re stating and the best way by which you assert it. You’re making it entertaining and you still care for to keep it wise. I can’t wait to read much more from you. That is really a wonderful site. [url=http://pandora-bracelet-cheap.blogspot.com]pandora charms bracelets[/url] pandora charms bracelets

  22. Posted by Sefetrelo | September 2, 2012 at 10:39 PM

    hey there and thanks for your information ? I ??????ve certainly picked up anything new from right here. I did on the other hand experience several technical issues using this website, as I experienced to reload the website lots of occasions previous to I may get it to load properly. I were wondering in case your web hosting is OK? [url=http://pandora-bracelet-shop.blogspot.com].[/url]

  23. Posted by Enlinghig | September 3, 2012 at 8:00 AM

    It’s perfect time to make a few plans for the future and it is time to be happy. I’ve learn this post and if I could I desire to suggest you some fascinating issues or suggestions. Maybe you can write next articles relating to this article. I want to read even more things approximately it! [url=http://pandorabracelet-top.blogspot.com]pandora dice charm[/url] pandora dice charm

  24. Posted by essepDugSuess | September 3, 2012 at 8:33 AM

    Hello [url=http://tootor.org/content/interesting-look-apache-tribe-and-subsequent-business-lessons].[/url] , simply turned into alert to your blog thru Google, and found that it is really informative [url=http://naughtybg.com/member/blog_post_view.php?postId=26527].[/url] . I??m gonna be careful for brussels. I??ll be grateful when you continue this in future. Numerous people can be benefited from your writing. Cheers! [url=http://www.gaylebi.com/member/blog_post_view.php?postId=65317].[/url] .

  25. Posted by essepDugSuess | September 4, 2012 at 3:14 AM

    I believe that is one of the most significant info for me. And i am happy studying your article. However wanna commentary on some normal issues, The website taste is ideal, the articles is in reality great : D. Just right job, cheers [url=http://maggameguide.com/content/china-russia-agree-promote-parliamentary-exchanges-embedded-pole-china-mv-vcb].[/url] .

  26. Posted by Sefetrelo | September 6, 2012 at 9:10 AM

    Nice post. I used to be checking constantly this blog and I am impressed! Extremely useful information particularly the closing section :) I care for such information much. I was seeking this certain info for a very lengthy time. Thanks and good luck. [url=http://customer-pandorabracelet.blogspot.com].[/url]

  27. Posted by Sefetrelo | September 7, 2012 at 12:43 AM

    Magnificent items from you, man. I’ve be aware your stuff prior to and you are simply extremely great. I actually like what you’ve received here, certainly like what you’re saying and the way during which you are saying it. You are making it enjoyable and you still care for to keep it wise. I can not wait to learn much more from you. That is actually a terrific website. [url=http://pandorabraceletsale.blogspot.com].[/url]

  28. Posted by ArtemiVerbmar | September 21, 2012 at 11:17 AM

    I believe this is one of the such a lot significant information for me. And i’m glad reading your article [url=http://www.newyorkuggbootsoutlet.com]ugg boots outlet stores[/url] But should observation on some general things, The site style is wonderful, the articles is in point of fact great : D [url=http://www.newyorkuggbootsoutlet.com]ugg boots outlet stores[/url] Just right activity, cheers

  29. Posted by Burton Puehler | October 3, 2012 at 2:43 AM

    for Webhosting in Baltimore. This post was introduced for you just by a ? web web hosting firm.Related

  30. Posted by Jerrold Allende | October 3, 2012 at 8:12 AM

    For your previous six or 7 many years, the Countrywide Automotive Record Collection (NAHC) in the Detroit Public Library, has been awarding the Future Collectible Car of the 12 months award from a list of cars which can be new that calendar year determined by automotive market professionals as getting new, not freshened. It has become awarded in December of every 12 months, just prior to the North American International Auto Display. It is voted on by the members with the Friends in the Countrywide Automotive History Collection. Hagerty appears to be to have occur up together with the plan as being a PR promotion.

  31. Posted by Jamee Ameen | October 5, 2012 at 3:51 PM

    The following time I learn a blog, I hope that it doesnt disappoint me as much as this one. I mean, I do know it was my option to read, however I really thought youd have one thing attention-grabbing to say. All I hear is a bunch of whining about one thing that you would repair should you werent too busy looking for attention.

  32. Posted by guild wars 2 gold | October 14, 2012 at 5:23 PM

    Wow, wonderful blog layout! How lengthy have you ever been running a blog for? you made running a blog look easy. The whole look of your web site is wonderful, as smartly as} the content!