Facebook IPO

While this blog deals with the financial services industry and not investment strategy or even one stock, I would be remiss if I, too, didn’t jump on the Facebook blog bandwagon.

With everyone gearing up for the huge Facebook IPO last Friday, one would think that things would go smoothly.  Brokers were ready, traders were ready and NASDAQ was, hmmm… NOT ready!

Here’s a brief rundown on how NASDAQ operates:

NASDAQ is a computerized system that prices and exchanges stocks. Instant quotes are provided for securities because it does not need to rely on a trading floor, which is the customary way of practicing stock exchange and pricing. Therefore, when buying and selling stock, a trader’s broker enters the quotes and stock quote information for the chosen security into the computer. The computer finds the best price on the stock being considered and the business transaction is completed. NASDAQ stock pricing and exchange can also be performed via telephone, teletype or via a corporation’s inventory account.

It seems that NASDAQ had a glitch and was not as prepared for the influx of trades as it had thought. For almost 20 minutes on Friday, NASDAQ was missing. Trades were not recorded timely, communication was down.  You can read the blow by blow HERE.

This is troublesome to me as an auditor.

What controls are in place at NASDAQ to ensure their system is operating correctly?  Who reviews and tests these controls? 

If there are problems when everyone knew Facebook’s IPO was coming and there would be millions of trades occurring in a very short time, what happens on a normal day when unexpected amounts of trades happen?

Typically service organizations (such as NASDAQ) will hire an accounting firm to perform an audit of their controls over processes during a certain period of time. This is called a Service Organization Control (SOC) report (formerly SAS 70).  (WS+B does many of these types of audits.)  A SOC report is supposed to give comfort to the user that transactions are being properly recorded.  I would love to see the SOC report that get issues covering last Friday.

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