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Nasdaq CEO Explains Facebook IPO's Bungle

Maria Bartiromo
Sunday, 20 May 2012 | 10:36 PM ET

Nasdaq CEO Bob Greifeld will be on high alert Monday morning when newly public company Facebook gets set to trade after Friday's debacle.

I spoke with Greifeld tonight who explained the specifics of what went wrong for Facebook's $20 billion initial public offering.

"We ran our IPO auction process differently than we run the regular open and close," Greifeld said. "Typically, we lock the order book two minutes before the auction is to take place."

But for IPOs, especially highly anticipated deals, the chance for investors to modify, cancel or change the order is left open until a millisecond before the auction begins. In this deal, given the sheer volume and size of deal, those modifications and cancellations proved too much for the system and responding in real time meant the execution confirmations did not get out until 1:50 p.m. Friday.

"We designed the system this way. And in theory, it's the best way to do it because it gives the investor more time to modify orders. But with the volume we were dealing with, there were collisions."

The Nasdaq didn't use the two-minute gate approach here because during earlier testing, it didn't identify that there would be issues. If I am an investor and I put an order in, I was able to modify it — up until a millisecond of when it was about to run. Greifeld said typically this is the better way to do it. But the deal was huge and so were the number of modifications.

On Friday, 570 million shares were traded and 70 million just at the IPO.

Greifeld is expecting another day of huge volume Monday in Facebook shares — "historic levels." And said he will focus on that, that Nasdaq does it well.

Sources tell me the next issue in Greifeld's lap is that of accommodation packages that Nasdaq will have to come up with to investors who were impacted and lost money on transactions. The size and expense this will be for Nasdaq is now unclear. As those packages materialize, Nasdaq will be able to better explain what Friday's debacle will truly mean for Nasdaq and Facebook investors. Tuesday, he will face questions from investors at the firm's annual shareholder meeting.

Tune in Monday to CNBC's "Closing Bell," for more on this story.

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