If you take a look at the UBS quarterly report, you can read the specifics of their claim (quoted below and available in full on the UBS website). Essentially, the bank asserts that NASDAQ initiated buy requests multiple times. Had Facebook stock sky-rocketed, as anticipated, I wonder if we would have ever heard a word of this?
"Due to multiple operational failures by NASDAQ, UBS’s pre-market orders were not confirmed for several hours after the stock had commenced trading. As a result of system protocols that we had designed to ensure our clients' orders were filled consistent with regulatory guidelines and our own standards, orders were entered multiple times before the necessary confirmations from NASDAQ were received and our systems were able to process them. NASDAQ ultimately filled all of these orders, exposing UBS to far more shares than our clients had ordered. UBS's loss resulted from NASDAQ's multiple failures to carry out its obligations, including both opening the Facebook stock for trading and not halting trading in the stock during the day. We will take
appropriate legal action against NASDAQ to address its gross mishandling of the offering and its substantial failures to perform its duties."
"Thank you for your placing an order with NASDAQ. Please do not hit the back button or refresh this page, or your order may be registered more than once."
So, shouldn't the protocol involve the client generating the order ID, so that they can cancel the order without having yet gotten confirmation of it? Or at least, the client being able to include a "client handle" for this purpose, that is independent of the order ID but which they can use to refer to it before they've gotten the ID?
Or have it do some high level of QOS where both sides need to acknowledge that the other side received the message otherwise cancel the request. This is pretty much what TCP does.
The real problem, according to UBS, is that in absence of an acknowledgement they sent extra orders. UBS improperly acted. The first rule when you set up risk limits is to consider both actual position (acknowledged) and theoretical position (assuming all orders are filled). Standard risk controls would have prevented this.
Yeah this seems like a baseless claim to me. I work on these kinds of applications and we always assume that an order is eligible to execute from when it's sent until the exchange confirms it has been canceled/deleted. This is pretty standard and it's surprising that a big bank would have such an obvious hole in their risk system, and disappointing that they would then fail to take responsibility for their own mistake.
I think the standard IPO buying strategy for a large institution like UBS is to make many large buy requests to make absolutely sure that all the brokers that want stock get it, then cancel when enough orders are fulfilled.
Since interest was very high on the FB IPO, the assumption would be that it would be fairly hard to actually get stock. So the bank would make a lot of requests, on the hope that a certain percentage would be fulfilled immediately(say 30-40%), after which they could cancel the remaining orders.
Unfortunately, this turned out not to be the case, because a LOT of FB stock was released to the market. Add to that that NASDAQ(as UBS contends) did not give a confirmation ID to UBS, and it's pretty easy to see why this happened.
How long do you wait before realizing that the system did not get your request? If you want to own some FB stock, and your request is not acknowledged, the obvious thing to do is send another request.
It's better to miss an opportunity than potentially expose yourself to a loss. If the exchange side system has become obviously unreliable (not responding to requests would count here), it's generally wise to stop trading.
I can see the temptation to just forge ahead on a one time only event like an IPO, but if you do so then I think you need to be prepared for the consequences. I also imagine that part of the usage terms for direct access include something that limit Nasdaq's liability in the event of a system error, so I'm not sure how UBS thinks they will get around that.
You may actually want to send multiple orders, which is why pretrade duplicate checks usually assume a fixed window (2 orders of the same price/quantity/side in a 50 msec window)
For example, sending a large order to the market looks different from many smaller orders.
I'd love to see during discovery that UBS has a high-frequency trading group that was partially responsible for seizing up the NASDAQ order book during the IPO.
UBS said it lost 349 million Swiss francs ($357 million) following Facebook's initial public offering, another blow in a quarter where earnings were already pressured by its struggling investment bank.
They are claiming losses resulting directly from NASDAQ's mishandling of the IPO.
What they should actually do is fire the bozos handling client orders in their wealth management group.
Having built multiple systems for automated trading and traded manually, it's really trading systems 101 to know that unacknowledged orders should be treated as live until you know otherwise and should never be repeated. Second, when you connect to Nasdaq via FIX or their proprietary protocol, one of the parameters you are allowed to specify is and ACK timeout. So if the exchange was getting around to acknowledging an order with a client timestamp that is more than ACK timeout old it is auto-cancelled. It seems from talking to multiple people that multiple firms including UBS hadn't set an ack timeout at all.
This isn't about the support level of Facebook's share price. UBS claims that NASDAQ was de facto dysfunctional. Too many buy orders were triggered, cancellations not being fulfilled and so on.
True, but the implication was that a lot of their FB activity was executed by their traders on behalf of their (now unhappy) clients. It's my opinion that this lawsuit wouldn't be happening if FB's stock was at $50.
Ofcourse it wouldn't be happening then, nobody would have had taken any damage if the FB stock had stayed or risen.
UBS would just have sold off the excess of shares it had received, perhaps at a profit. Perhaps just warning NASDAQ of their reckless technical situation.
That doesn't mean that there for some reason this lawsuit isn't justified. NASDAQ made UBS take a risk they did not want to take.
Well, of course not. That doesn't necessarily make it invalid. If your bank took 10k from your account and didn't give it back, you would sue them. If they put an extra 10k in your account you clearly wouldn't!
>> this lawsuit wouldn't be happening if FB's stock was at $50
maybe not from UBS, but probably from somebody else. if you were putting in excess short sell orders at the open an FB had gone up, you'd be in the same position UBS is in right now.
Can someone shed some light onto how common of an occurrence this is? It seems like the world of finance is frequented by trigger-happy lawyers and that this might be a commonplace occurrence.
It's pretty common, I can recall lots of these cases around IPOs that didn't sky rocket as planned.
This one may be a little more unique because NASDAQ seems to have had actual technical issues with the IPOD. Given the current stock proceed of FB though, I'm curious how their argument is framed.
A bank sues stock marked over some number fluctuation caused by social network and all that produces millions of profits for the lawyers :) . If I would be more naive I'd say "Let them all burn down". But since all that translates to billions of real money and can possibly harm entire countries in some cases (like the LIBOR scandal) we can only watch and wonder how did we come here...
Yep "including clients of our wealth management businesses."
The people running the UBS wealth management business need to be terminated. This is most likely the catalyst for why UBS is actually suing. Rest of the "clients" who did no research and just bought into the hype are just along in the lawsuit for the ride.
>> This is most likely the catalyst for why UBS is actually suing
unlikely. from their quarterly report " NASDAQ ultimately filled all of these orders, exposing UBS to far more shares than our clients had ordered".
their clients ordered X shares of FB. UBS sent out 5 * X shares (or something like that). they sent out extra orders because NASDAQ wasn't sending acknowledgements for the initial orders. so UBS had to liquidate 4 * X shares at a loss, because the price took a dive. the loss from liquidation is why they sued.
"Due to multiple operational failures by NASDAQ, UBS’s pre-market orders were not confirmed for several hours after the stock had commenced trading. As a result of system protocols that we had designed to ensure our clients' orders were filled consistent with regulatory guidelines and our own standards, orders were entered multiple times before the necessary confirmations from NASDAQ were received and our systems were able to process them. NASDAQ ultimately filled all of these orders, exposing UBS to far more shares than our clients had ordered. UBS's loss resulted from NASDAQ's multiple failures to carry out its obligations, including both opening the Facebook stock for trading and not halting trading in the stock during the day. We will take appropriate legal action against NASDAQ to address its gross mishandling of the offering and its substantial failures to perform its duties."