SEC on Infinite Loop Of Facebook IPO

Matt Levine through the deal maker did lovely story of Facebook IPO on Nasdaq . The First few pages are worth a read . imagesHere are the details from SEC account

In a typical IPO on NASDAQ, shares of the issuer are sold by the IPO’s underwriters to participating purchasers at approximately midnight and secondary market trading begins later that morning. Secondary trading begins after a designated period – called the ‘Display Only Period’ or ‘DOP’ – during which members can specify the price and quantity of shares that they are willing to buy or sell (along with various other order characteristics), and can also cancel and/or replace previous orders. The DOP usually lasts 15 minutes…
At the end of the DOP, NASDAQ’s “IPO Cross Application” analyzes all of the buy and sell orders to determine the price at which the largest number of shares will trade and then NASDAQ’s matching engine matches buy and sell orders at that price…
NASDAQ’s systems run a ‘validation check’ which confirms that the orders in the IPO Cross Application are identical to those in NASDAQ’s matching engine. One reason that the orders might not match is because NASDAQ allowed orders to be cancelled at any time up until the end of the DOP – including the very brief interval during which the IPO Cross Application was calculating the price and volume of the cross. If any of the orders used to calculate the price and volume of the cross had been cancelled during the IPO Cross Application’s calculation process, the validation check would fail and the system would cause the IPO Cross Application to recalculate the price and volume of the cross.
This second calculation by the IPO Cross Application, if necessary, incorporated only the first cancellation received during the first calculation, as well as any new orders that were received between the beginning of the first calculation and the receipt of that first cancellation. Thus, if there were multiple orders cancelled during the first IPO Cross Application’s calculation, the validation check performed after the second calculation would fail again and the IPO Cross Application would need to be run a third time in order to include the second cancellation, as well as any orders received between the first and second cancellations.
Because the share and volume calculations and validation checks occur in a matter of milliseconds it was usually possible for the system to incorporate multiple cancellations (and intervening orders) and produce a calculation that satisfies the validation check after a few cycles of calculation and validation. However, the design of the system created the risk that if orders continued to be cancelled during each recalculation, a repeated cycle of validation checks and re-calculations – known as a ‘loop’ – would occur, preventing NASDAQ’s system from: (i) completing the cross; (ii) reporting the price and volume of the executions in the cross (a report known as the “bulk print”); and (iii) commencing normal secondary market trading.
This is precious in so many ways: and I am sure that you can guess what happened next. Don’t you love the SEC telling us what a loop is? But lolz aside, it does suggest that IT systems written for the pre-HFT era are not necessarily fit for purpose today.

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