A perfect storm. It was the most widely anticipated and watched IPO in history. The face of Wall Street, painted in greed since the latest recession, had a chance to re-gain consumer confidence on a large scale. They couldn’t have failed in a bigger and more public way.
Technology failed. Communications failed. Leadership was absent. It was a deadly triple whammy. The technical staff ran stiff tests of the software to simulate the expected opening trade environment. The tests were successful with 53 million shares, but something went wrong and the systems could not handle the 70 million shares in the opening trade. But they had also changed one important factor in the IPO procedure that had never been done before – allowing orders to be placed right up to the opening instead of the usual halt.
Stock exchanges confirm each order immediately so a trader knows how many shares they bought or sold and at what price. This is an expected step in the process of stock trading.
When Nasdaq failed to confirm orders, it caused chaos and panic among investors. People who had put in buy orders were now canceling them and some fund managers sold their entire positions because of the confusion. The market was in the dark about the stock price and the status of their orders. When confirmations were finally sent out hours later, investors were surprised they had more shares than they wanted and that triggered more sell orders giving the impression that the stock had fallen out of favor with investors.
This was the biggest IPO ever for the trading system. What were the big things that went wrong? The paramount unknown was share volume. Although a single unknown variable in a technical system can push a system to its limit and break it as in this case. But that wasn’t the only factor. The change in the procedure compounded the unknown volume problem.
The situation of no trade confirmations and a communications dearth from Nasdaq during the critical time after the opening contributed to more uncertainty in an increasingly unstable environment. Without trade confirmations, the traders and investors were operating in the dark. So they decided to cancel orders and sell off their positions – adding to an already jammed system.
The last factor was the CEO of Nasdaq was out of touch. He was on an airplane for five hours incommunicado unable to communicate by phone or email. He had no idea what was taking place on the ground.
Preventive measures and actions for when events go south:
- Truth is vital. Relying on tech gurus is a good thing. Make sure that you can trust they will tell you the truth and all relevant information so the best decisions can be made.
- Prepare for failure. Anticipate that something will go wrong. Even with practice runs and trials, it is impossible to create a test environment that exactly mimics a live environment.
- Regular communication. In a time of failure, communicate status at regular intervals, even if nothing has changed. This helps instill calm and prevents rumors that lead to chaos because no one knows.
- Control changes. When there is an overwhelming risk factor, minimize the overall risk by not introducing new changes in procedures, personnel, software and hardware.
- Prepare what to say if an anticipated problem occurs.
- Don’t make assumptions that problems are cleared and will stay that way. Leadership needs to be involved at all times until the crisis has ended. Decisions need to be made quickly. Airplanes have the most unreliable technology. It’s not the place to be in a crisis.