Citadel Securities Burned On Facebook IPO Fiasco

May 25 2012 | 3:32am ET

Citadel Investment Group's broker-dealer unit lost between $30 million and $35 million due to problems with Facebook's Friday initial public offering.

That IPO, the third-largest in U.S. history, was marred by technical glitches and backing from its underwriters to keep Facebook's share price from plummeting. Citadel Securities' Execution Services unit suffered its losses when it honored trades that were cancelled or modified during the two hours after Facebook's shares debuted on the Nasdaq Stock Market.

Technical problems prevented some orders from being confirmed. Nasdaq has asked market-makers to provide loss estimates by Monday evening. The Financial Industry Regulatory Authority will then review those estimates and offer a report in about a month.

Citadel's hedge funds were not affected by the Facebook fiasco at its broker-dealer.

It is unclear whether Citadel plans to sue Nasdaq, although at least one of its rivals, Knight Capital Group, has already threatened to do so if the exchange does not cover its losses, which were about the same as Citadel's. Nasdaq has already been hit with a class-action lawsuit, and its CEO said this week, "clearly we had mistakes in the Facebook listing."

One hedge fund manager gave the New York Post an idea of the mess that faced investors on Friday.

"I tried to short 15,000 shares on the opening," the anonymous money manager said. "I wanted to short 50,000, but 15 was all I could get."

He didn't even get that much. Despite a verbal confirmation of the 15,000 share short interest, he got only 5,000 of the shares he hoped to short. In the interim, he bought 15,000 shares to cover his short.

"I ended up losing money," he told the tabloid.

While demand to borrow Facebook stock—and short it—remains high, many hedge fund managers are wary of a short squeeze on the stock. "The usual Wall Street game is to shake out the weak hands and get them to puke it up," Rocker Partners founder David Rocker told the Post.

Others are still predicting a dramatic fall from grace for Facebook, which priced at $38 but is now trading in the low $30s. Some put options on the stock have it falling below $22.

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