Individuals Seeking IPOs Online Often Face a Frustrating Task By ANDREW FRASER, THE WALL STREET JOURNAL
Who says landing shares of a hot initial public offering has become easier for individuals
now that online brokers have cracked open the doors to the once-exclusive IPO party?
For thousands of small investors trying to snag a highflying IPO at the ground-floor
price, getting shares through an online broker is still no easy game. It's a rat race that
requires perseverance and lots of luck.
Demand for online IPO shares outstrips available supplies by far, and most investors are
shut out. Ask Joe the "LuckyIrishman" or Jeff Barrish. They are among the many
investors who have faced the daunting experience.
"It's completely frustrating," says Joe, a 26-year old computer specialist from Chicago
who wanted his last name withheld. He uses the screen name LuckyIrishman to vent his
frustration on the Internet.
"Basically, it's always the same," agrees Mr. Barrish, a 50-year-old accountant from
San Antonio. "The small investor doesn't stand much of a chance."
After watching the stunning gains of some Internet IPOs recently, small investors are
clamoring for a shot at the pot of gold. Internet consulting firm Gomez Advisors found
that 61% of online investors want IPOs.
And online brokerage firms such as Wit Capital Group and E*Trade Group recently
have been catering to that demand as they seek to lure new customers and boost
business in the highly competitive online-trading field.
Although online brokerage firms have given ordinary individuals access to the party once
reserved for well-connected investors, such as professional money managers and
affluent individuals, their odds of landing IPO shares are still very overwhelming.
Many individual investors have complained, on the Internet and to regulators, that they
have been unsuccessful trying to snare an IPO through their Web brokers. And the
process used by brokers to allocate shares to investors has come under attack.
E*Trade allocates shares on a first-come, first-serve basis. Until recently, Wit Capital
did the same. DLJdirect, the online arm of Donaldson Lufkin & Jenrette Securities, and
Charles Schwab don't. They consider a client's asset and trading activity among other
things.
Investors who want to get IPO shares usually must wait for a message on the broker's
Web site announcing the availability of an IPO and requesting orders to participate in
the offering. And, due to high demand, the window of opportunity for orders can be
very short.
Messages for investors to submit orders are usually posted after market hours. But
investors say they must sit in front of their terminals and refresh their Web browsers
periodically to make sure they don't miss one of those IPO notices.
Tough luck for those who do.
"These guys are like gold miners panning and it's hard work," says Tom Madden,
founder of IPO Monitor, a Los Angeles industry newsletter. "Some of them get
frustrated."
For many E*Trade customers, such as LuckyIrishman and Mr. Barrish, the chance of
getting an IPO is usually slim. LuckyIrishman has tried without luck for seven IPOs. Mr.
Barrish scored just twice in 12 attempts.
Since E*Trade awards IPOs on a first-come, first-serve basis, success for its clients
depends on getting orders submitted within the first few minutes after the firm opens the
order-taking process because the IPOs sell out quickly.
"In the last month I've been in on at least two in the first five minutes and I wasn't even
close," Mr. Barrish complains. "Guys in the first two or three minutes got them."
Nonetheless, many online investors make IPO investing a pastime, albeit a very
challenging one.
There are Internet message boards dedicated solely for investors to help each other
grab a golden egg through Web brokers such as E*Trade and Wit Capital. And IPO
war stories on the Net can rival a comedy show.
The game even has its own terminology. For example, "clickers" for investors who sit at
their computers refreshing their brokers' screens for notices to submit orders for an
IPO. "Clickbait" for IPOs.
There are tales of investors chained to their computers for hours just waiting for their
Web broker to open the door for orders. Then the race is on.
For many, snagging one of these deals has become an exercise in desperation. Investors
complain that they have missed out on deals because they left their computers briefly
just as their brokers began to take orders.
"Basically everybody is sitting there waiting," says Mr. Barrish. He missed out on two
deals because he left his computer at the wrong moment: once to use the bathroom and
the other time to grab a bite.
Joe, the computer specialist from Chicago, says he blew one IPO because he got up to
grab a piece of paper from a printer that was about 50 feet from his computer.
But they have a lot of company. "The price of a rotisserie chicken. Went out to buy a
bird. What does it cost me, maybe $6,000," one unlucky investor complained on an
Internet board devoted to E*Trade IPOs on the Silicon Investor Web site
(www.techstocks.com).
"You bought a chicken? Hell, you think that is bad? I took ten minutes off clicking to
watch opera," another equally disgruntled investor who posted under the name Bob
Duncan responded in follow-up message.
"Don't forget to tie a chicken or something to the desk in case you get hungry," advises
another poster who used the Internet screen name Marshall001.
And a poster who uses the screen name Dale Weaver, says he missed one IPO going to
McDonalds, another taking a quick walk and a third when he went to the bathroom.
"Now, I just stay put and click like a mad dog nonstop."
The main problem says Dan Burke, an online analyst at Gomez Advisors, of Concord,
Mass., is that investor demand "excessively outweighs" the sprinkling of IPO shares
online brokers get.
"So many people are clamoring for shares and there are not enough to go around," Mr.
Burke says. He estimates online brokers usually receive a scant 3% to 5% of an IPO on
average for distribution to individuals.
E*Trade, which has more than one million accounts, wouldn't say what sort of demand
it gets for its IPOs. But its window for successfully landing IPOs has narrowed to
minutes from hours -- a sign of very high demand.
Wit, one of the most active brokers in the online IPO field, admits it is overwhelmed by
demand. Wit founder Andrew Klein has said that only 10% to 25% of his 17,500
clients who want IPO shares get some.
"We have experienced a high level of customer dissatisfaction,'' Wit said in a recent filing
with the U.S. Securities and Exchange Commission for its own IPO. Its shares began
trading Friday on Nasdaq Stock Market.
But Wit Capital has responded to investor complaints. The broker recently said it is
switching away from a first-come, first-serve process for allocating IPOs to a lottery
system. Some investors feel this is fairer.
Another player, Friedman, Billings, Ramsey & Co., also has shifted to a lottery.
E*Trade is weighing a lottery system although no decision has yet been made to
abandon the current process, says spokesman Russell Simon.
Nonetheless, Mr. Burke of Gomez Advisors, says the number of complaints from
investors won't decrease until online brokers start receiving more shares of IPOs to
distribute. For that, they will have to become bigger players in underwriting.
Mr. Simon said E*Trade is negotiating with IPO underwriters for a bigger allotment of
shares. He noted that the firm's involvement with recently formed online investment bank
E*Offering will lead to more IPO shares.
Nevertheless, for a shot at an IPO that might double or triple in price on the first day,
many online investors who play the game put up with the hassle. Some have employed
creative techniques to help increase their chances of success.
Joe the LuckyIrishman says he uses two computers to submit orders for two separate
accounts, although that hasn't paid off for him.
The person who posts as Bob Duncan says he has treated his friends with pizza and
beer to get them to monitor the E*Trade site for IPO announcements for him.
"My friend has his [85-year-old] grandfather in front of the computer using the mouse
clicking when he has to eat, go to the bathroom and all else," says a poster called
$Mogul. "It's a sad [sight] to see."
At Indiana University, a group of students has formed a network. One person is
designated every day to monitor the E*Trade site for IPO announcements and pages
the others when the firm starts taking orders.
Some companies and computer savvy individuals are selling software that monitors a
broker's Web page and lets investors know when something new has been posted.
Some programs automatically page investors when they are away from their computers.
There also is a budding cottage industry of professional monitors who do the same thing
for a fee.
But some investors are becoming fed up. Investors recently filed lawsuits in California
state courts against E*Trade and DLJdirect, alleging the firms haven't made meaningful
amounts of IPOs available. Mr. Simon, of E*Trade, says the lawsuit against that firm
has no merit. A spokeswoman for DLJdirect didn't immediately return a telephone call
for comment on Friday.
And the SEC says it has received numerous complaints from investors in the short time
online brokers have been making IPOs available to investors. SEC Chairman Arthur
Levitt urged online brokers in a letter last month to ensure they aren't creating
unreasonable expectations among individuals about their chances of getting IPOs.
"It is important that brokers clarify that the high demand for a limited allocation of shares
may make it unlikely that any single investor will be able to participate, or participate as
fully as expected," he said.
While awarding IPOs is a business decision that the SEC says it cannot regulate, Mr.
Levitt told online brokers that they should inform their customers more specifically about
the methods they use to allocate shares to keep "your customers' expectations in line
with your ability to meet them." |
