Nasdaq trips Facebook, so what will investors say?

(MoneyWatch) COMMENTARY Facebook's (FB) IPO last Friday on Nasdaq was anything but smooth. The stock exchange long associated with many of the biggest technology firms in the world had a technical meltdown that interfered with the company's shares trading.

With long-time complaints from privacy advocates, inquiries by regulators, questions about the company's valuation, and a checkered past of lawsuits by people who were present at its start and claimed they were cheated, Facebook is hardly new to controversy. But the latest row has the company in the position of victim, not perpetrator. And it raises the question of whether major stock exchanges really have the necessary stability and power they need at critical times. To put it differently, when you want to invest and grab hold of an opportunity, will you be able to? And will Nasdaq lose business as a result?

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The early hours of an IPO are normally critical, and that becomes even truer when the subject is the biggest tech IPO ever. Design flaws kept Nasdaq's systems from properly processing cancellations of orders for Facebook shares and actually delayed the IPO for almost half an hour. It took professional traders hours to learn whether their orders went through. The exchange had undertaken testing in advance that failed to identify the potential glitch. Nasdaq OMX Group CEO Robert Greifeld said, "This was not our finest hour," and that the exchange was "humbly embarrassed" by the problems.

Trading problems on exchanges are infrequent, but still common enough. In March, BATS Global Markets, the third largest U.S. equity exchange after NYSE and Nasdaq, tried to show that it could also handle IPOs by running its own. A "devastating" system breakdown affected listings that began with an A or B, including its own. After more than two hours, the company withdrew its IPO. Even though BATS boasted 99.99 percent uptime, that one high-profile problem ended its quest, at least for the immediate future, to capture some of the IPO business from the two bigger exchanges.

Problems in the past

Although Facebook's IPO did finally go live (to ultimately tepid response from the secondary markets, as the stock price remains roughly where it started), the incident leaves Nasdaq with some tough questions to answer. Years ago, the exchange had a history of embarrassing problems:

• A squirrel that crawled inside a Connecticut utility's facilities caused a power outage in 1987 that took Nasdaq's system down for 82 minutes. So-called mission critical computer systems typically have adequate power backup to keep running in case of a supply problem.
• Equipment failure took down the exchange's systems for nearly an hour-and-a-half in 1999.
• The next year, Nasdaq had an end-of-day failure on November 30 that kept many brokers from seeing prices.

With such a background, the question Nasdaq faces from companies that want to trade shares, institutional investors, and investment banks is why the exchange has yet to make its systems bullet-proof. Are programmers forced to work too fast because of competition-driven demand for new algorithms and capabilities, and does the design process open systems to dangerous vulnerabilities?

For now, Nasdaq must reprove itself or risk losing business, possibly even to other exchanges.