Losses Pile Up in Fallout from Facebook IPO

by Jordan Richardson on May 28, 2012

The Facebook initial public offering fiasco continues to reveal even more losses. Citigroup Inc.’s Automated Trading Desk apparently experienced losses of $20 million during the IPO.

The Citigroup losses can now be added to a pile of other losses that include Knight Capital Group Inc. and Citadel Securities. Both apparently lost funds in the neighbourhood of $30 to $35 million.

On Friday, NASDAQ asked various firms to disclose their loss details by Monday night. From there, the regulators will take to the data and try to sort through this whole mess. A report on Facebook’s IPO and the tumult behind it is expected to make its debut within about four weeks, so we should have some more information on exactly what went wrong.

What was once hyped to be one of the most exciting, lucrative IPOs of all time has now degenerated into a raging sea of lawsuits and confusion. Perhaps a big part of the problem was the overvaluation of the social networking company’s worth right out of the box, a fact that some analysts tried to expound upon. With a limited revenue stream and a fleet of “free” users, Facebook never was going to be a hotbed for money-making on its own. Advertising was necessary, but finding the balance between user satisfaction and revenue from marketing opportunities is tricky.

When the day itself came and Facebook got set to open trading, NASDAQ hit a glitch. It was originally considered that trading would commence at 11 am, but nothing happened until about a half hour later. Trading was frenetic when it actually did get underway, with over 80 million FB shares changing hands in the first 30 seconds. The trouble was that some traders were reporting that their orders weren’t going through. Others received shares at much higher prices than they thought.

According to NASDAQ, the trouble was a technical glitch. That glitch led to a pile-up of stock orders for Facebook shares because many traders submitted order changes before opening trading began, tossing another proverbial monkey wrench in things. In order to handle the swell of orders and tackle the glitch, NASDAQ switched trading over to another system. In that switch, some orders were lost and others were filed later in the day at worse prices.

As you might imagine, the effects from such a glitch haven’t been pretty.

Then there’s the whole mess with Facebook and its bankers only letting certain investors in on some pretty important information regarding the stock’s fortunes. Underwriters cut revenue targets, but only some investors were privy to that. As a result, a group of Facebook shareholders are now suing the social networking giant. They may have a case, as the fact that four major underwriters cut their earnings outlooks at roughly the same time prior to the IPO doesn’t look good.

It’s clear that Facebook’s IPO went sour somewhere along the line, but some have argued that this type of outcome was always in the wind. It may be long past time to examine how we value different services in the fickle sector of tech and tech-related services. While little could’ve been done to avoid NASDAQ’s glitch, the whole situation should serve as an object lesson for future situations along these lines.

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Written by: Jordan Richardson. www.digitcom.ca. Follow TheTelecomBlog.com by: RSSTwitterFacebook, or YouTube.

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