Did a Stuck Quote Prevent a Facebook Opening Day Pop?

Nanex Research

Nanex ~ 25-May-2012

On 18-May-2012, within seconds of the opening in Facebook, we noticed an exceptional occurrence: Nasdaq quotes had higher bid prices than ask prices. This is called a crossed market and occurs frequently between two different exchanges, but practically never on the same exchange (the buyer just needs to match up with the seller, which is fundamentally what an exchange does).

When Nasdaq's ask price dropped below its bid price, the quote was marked non-firm -- indicating something is wrong with it, and for software to exclude it from any best bid/offer calculations. However, in several of the earlier occurrences the first non-firm crossed quote was immediately preceded by a regular or firm crossed quote!

During the immediate period of time when the Nasdaq quote went from normal to non-firm, you can see an immediate evaporation in quotes from other exchanges, often accompanied by a flurry of trades. We first noticed this behavior while making a video of quotes during the opening period in Facebook trading.

The reaction to the crossed quote often resulted in the spread to widen from 1 cents to 70 cents or more in 1/10th of a second! It is important to realize that algorithms (algos) which are based on speed use existing prices (orders) from other exchanges as their primary (if not sole) input. So it is quite conceivable, if not highly likely that these unusual, and rare inverted quotes coming from Nasdaq influenced algorithms running on other exchanges.

It is now more than a curiosity that the market was unable to penetrate Nasdaq's crossed $42.99 bid which appeared within 30 second of the open and remained stuck until 13:50. Could this have prevented the often expected pop (increase) in an IPO's stock price for FaceBook?

This also brings another example of the dangers of placing a blind, mindless emphasis on speed above everything else. Algos reacting to prices created by other algos reacting to prices created by still other algos. Somewhere along the way, it has to start with a price based on economic reality. But the algos at the bottom of the intelligence chain can't waste precious milliseconds for that. They are built to simply react faster than the other guys algos. Why? Because the other guy figured out how to go faster! We don't need this in our markets. We need more intelligence. The economic and psychological costs stemming from Facebook not getting the traditional opening day pop are impossible to measure. That it may have been caused by algos reacting to a stuck quote from one exchange is not, sadly, surprising anymore.

Chart 1. NBBO (National Best Bid or Offer) Spread along with Nasdaq quote.
NBBO Spread colored black: bid < ask (normal), yellow: bid = ask (locked), or red: bid > ask (crossed).

Chart 2. Nasdaq's Stuck Bid appears to set a defined ceiling in Facebooks stock price during the first minute of trading.

Chart 3. Close-up showing NBBO along with ARCA quotes (red) and Nasdaq quotes (black = normal, green if non-firm).

Chart 4. Same period of time as chart 3, but showing NBBO and trades from Arca (red circles) and Nasdaq (black circles) for reference.

Chart 5. Note how the spread tightens in all exchanges when Nasdaq Quote goes from Non-firm to normal.

Chart 6. Just before Nq Quote changes to non-firm, a crossed quote from Nasdaq appears and is marked normal.

Chart 7. The next charts are more examples of other exchange prices reacting to Nasdaq's quote changing to non-firm

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Nanex Research