Wednesday, June 19, 2013

The Ever-Expanding Nasdaq Performance Crash Costs

Keeping track of the stated costs of the Nasdaq performance problems during the Facebook IPO of May 18, 2012 is like trying to contain Gorilla Glue - it just keeps growing. This may be the largest single software defect cost in history. The total to date is $72 Million.

First reports were that Nasdaq had set aside $40 million to pay investment firms for their losses, then the number increased to $62 million on March 25, 2013.

Most recently, the SEC announced an additional $10 million fine on May 29th, 2013. Mention was also made of $2 million paid to investors, but in this meatloaf pile of money, I'm not sure if that was part of the $62 million or in another pile somewhere.

One of the best accounts of what happened is here:

This account shows that not only was there a technical problem causing severe performance issues, but alleged securities laws violations resulting from its "poor systems and decision-making".

From the CNBC story, "The SEC said several members of Nasdaq's senior leadership team convened a "Code Blue" conference call at the SEC's request and, thinking that they had fixed the problem by removing a few lines of code, chose not to delay the start of secondary market trading in Facebook shares. But they had not grasped the root cause, the SEC said. The decision to resume trading without fully understanding the problem resulted in violations of several rules, according to the SEC, including Nasdaq's own rule governing the price/time priority for executing trade orders." (emphasis mine)

There were also numerous other rules broken by Nasdaq, which are detailed in the CNBC story.

This is a sad story of: 1. the impact of poor performance in the real world, 2. how just one or two lines of code can bring down a system and cause extensive losses, 3. how making a decision without knowing the true (root) cause can make things even worse, 4. how the cost of the impact of a software defect (not a bug or a glitch) can be extraordinarily high and continue to grow due to lawsuits, fines and penalties.

Unfortunately, the real losers in all this are the individual investors who are still underwater in their initial investment in Facebook.

In this story from NBC (

"Facebook's IPO on May 18, 2012 was marred by technical glitches that left the market makers — who facilitate trades for brokers and are crucial to the smooth operation of stock trading — in the dark for hours as to which trades had gone through.

Nasdaq said it tested its systems before the IPO but the testing did not reveal the "design flaw" that caused the glitches."

I hate it when that happens!

Glitches???  That is system failure due to defective code. The story did say "dark for hours." A glitch is a momentary occurrence, but sounds better than it really is. Maybe if we called these failures what they really are - defects, that would start to convey some seriousness of the situation.

Here is an interesting quote from George S. Canellos, co-director of the SEC's Division of Enforcement, "This action against Nasdaq tells the tale of how poorly designed systems and hasty decision-making not only disrupted one of the largest IPOs in history, but produced serious and pervasive violations of fundamental rules governing our markets."

Now, the question is, "Will lessons truly be learned form this?"

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