Facebook and Knight: Human-Fail and SkyNet-Fail?

Thursday, August 2, 2012 at 10am
By John Friedman

According to someone out there with the need to calculate this number, “the volume-weighted average price of Facebook stock on May 18, 2012, between 1:50 pm and 2:35 pm” was $40.527.

That was the day Facebook went public.

That was also the day that the modern stock market had, by some people’s reckoning, the worst initial public offering of all time (quick primer: an initial public offering, or IPO, is the first selling to the public-at-large of shares in a company; it all happens on a single day, and in most instances it’s a wonderful day for everyone involved, as in, big-bucks-made, so much so that you’ll just about always see the smiling faces of some of the highest-up heavy-hitters within that “everyone” ringing the closing bell — literally ringing it — at the market close of that IPO banner day).

As Felix Salmon points out this morning on the twitter-machine, Facebook shares have now fallen by half from that dollar-weighted price, and are trading at $19.99 as I write. Fingers point at failures in (a) the newly-minted pre-IPO market (of which Facebook was king, queen, princess and prince), (b) the failure of the stock market machinery on the day of the IPO, (c) Mark Zuckerberg, (d) Wall Street, (e) greed, and (f) all of the above.

All in all, and by most measures, at this point it’s safe to say that the Facebook IPO has been an acute fail — a fail on the day of, followed by a lingering, crawling, stupefying fail ever since.

*  *  *

Lots of young folks are keen on Facebook, and this might well be their first inkling of IPO-land. Fifteen years ago, in the pre-bubble-burst days, the young folks of the time imprinted on a much happier picture. There were still bad results here and there, but, back then, there were a whole lot of happy campers on IPO-day and for most of the days following.

Today? Not so much. $FB (as the stock is known in the twitter-machine) has given young folks a whole different paradigm, as in: this is where you get taken to the cleaners.

*  *  *

At the other end of the spectrum, market old-timers are shaking their collective heads today as, yesterday, the simple nuts ‘n bolts of trading — nuts ‘n bolts that have been happily nutting and bolting their days away with nary a hitch in the U.S. stock market for more than a century — just plain ol’ failed .

Time will tell what all happened, but it sounds like Knight Capital lost $440 million — in the span of 30 minutes — when, as best can currently be known, its computers pulled a SkyNet and started buying everything in sight! Twice!

*  *  *

Big things are difficult to control. Tsunamis, Mongol hordes in their heyday, huge multi-national businesses, governments, Mother Earth, etc. — none are easily lasso’ed. There is just something about size.

The U.S. stock market is big. Real big. Billions of shares of stock trade every day in U.S. stock markets and, just to zero in on one slice of that bigness, 47.8 million Facebook shares traded hands on an average day over the past three months. And that means that, in the past 21 days or so, Facebook alone accounted for a billion shares traded ($20 billion worth of stock, given today’s price).

How easy do you think it is to control all of that? To make it function smoothly?

If Knight’s $440 million problem yesterday, and Facebook’s IPO-fail is any indication, it might be too difficult for both SkyNet and for humans.

Let’s hope not.

 

536 words

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