Exchanges iron out kinks as Facebook IPO looms

Tue May 15, 2012 5:59pm EDT

* Nasdaq running tests prior to Facebook debut

* NYSE Arca to isolate Facebook trades on a specific server

* Electronic glitches are not uncommon in IPOs

By John McCrank

NEW YORK, May 15 (Reuters) - The frenzy around Facebook's public debut has exchange operators taking extra precautions to make sure the social network giant's stock trades smoothly on Friday, especially in the wake of recent technical glitches.

When Facebook Chief Executive Mark Zuckerberg rings Nasdaq OMX's opening market bell on Friday from company headquarters in Menlo Park, California, Nasdaq will have completed three straight days of testing on its initial public offering systems.

On Tuesday, the exchange ran a test debut using the dummy ticker symbol ZWZZT. The stock began the test with a massive surge of nearly 11 million shares.

The New York-based exchange conducted another test last week, and has more planned for Wednesday and Thursday.

"They're doing their due diligence to make sure nothing goes wrong, but there is no way in an electronic world that you can guarantee that," said Joseph Saluzzi, co-head of equity trading at Themis Trading.

Investor confidence in the equity markets, where trading is largely computer-driven, has wavered since the "flash crash" in May 2010 when $1 trillion in shareholder equity was temporarily wiped out in a matter of minutes.

CANCELED TRADES

Just last week, the day before Nasdaq began its IPO tests, the IPO of a small Nasdaq-listed company went awry and a batch of trades had to be canceled.

Shares of Andina Acquisition Corp, which focuses on mergers and acquisitions in Colombia, were priced to trade at $10 on Thursday, but in a brief period a series of quotes went through as high as $139,999.99, Reuters data shows. The quotes were canceled about an hour later.

Asked about the Andina IPO, a Nasdaq spokesman declined to comment.

A misstep on Facebook's public offering could have more far-reaching consequences.

In March, the botched IPO of BATS Global Markets refocused attention on the potential for marketplace mishaps. A series of unforeseen glitches hit the company's market debut on its own exchange and caused the No. 3 U.S. exchange to take the extremely rare step of withdrawing its IPO.

The debacle also led to a fouled trade in shares of Apple Inc, the world's most valuable company, and caused a temporary halt in the stock.

SPLUNK COSTS

"The issue is that increasingly the markets are interconnected," said Larry Tabb, chief executive of research firm TABB Group.

When data-mining software maker Splunk went public on Nasdaq on April 19, it was very well-received and it shares soared, tripping a circuit breaker that temporarily halted the stock, but its shares continued trading on NYSE Arca during the halt, and those trades had to be canceled.

NYSE Euronext said that because Facebook's IPO has the potential to be so large, it would be taking extra precautions to make sure activity on NYSE Arca is smooth.

NYSE said it will dedicate a server to handle Facebook trades in anticipation of heavy market order volume.

"They just want to make sure that the process works and that something doesn't go wrong as newer firms come to market," Tabb said of the preparations at the exchanges.

"It's bad enough having BATS blowup and Splunk have some problems, but if Facebook turned out to be a market disaster, it would be huge," said Tabb.

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