NY Times

Online Investors Grasping Initial Offerings
 
By PATRICK MCGEEHAN
Published: December 2, 1999
Rishi Mehta (Richard Mehta)

White-collar workers used to fret that if they lost
their jobs, they might wind up flipping burgers. Dean
Browning is making up for at least part of his lost
wages by flipping stocks of newly public companies.

Until February, Mr. Browning was a financial executive
at a plastics company in Easton, Pa. But he has spent
several months of this year buying and quickly
reselling shares of companies offering stock to the
public for the first time.

He and a growing number of small investors are using a
money-making method that until recently excluded
people like them in favor of much larger investors, a
method that even Mr. Browning expects will vanish
sometime soon.

''I'm not so sure I can make a living doing this,''
Mr. Browning said, from his office in his Allentown, Pa., home, clad in sweatpants and a T-shirt, his dog
curled up at his feet. ''I don't know how much longer
this market is going to exist.'' Even now, he makes
far less than he used to.

So far in 1999, though, an extraordinarily buoyant
market for new stocks has made trading them an easy
way to make a modest amount of money. In November,
companies raised almost twice as much, $16.9 billion,
through first-time sales of stock as in any other
month, according to Thomson Financial Securities Data.
The average gain in the first day of trading for
initial public offerings in November was also the
highest ever, at 102 percent.

The 501 initial public offerings, or I.P.O.'s, this
year have jumped an average of 62 percent on their
first day of trading, more than three times the
first-day gain in any other year in the 1990's. A
dozen quadrupled and 22 more tripled in the first day
from the prices at which they were offered to
investors.

For stocks to appreciate that quickly, the shares have
to change hands rapidly, with some being bought and
sold several times a day. That is hardly the sort of
buy-and-hold investing that many market experts like
Byron Wien recommend for most investors. ''These
people just rent the stocks, they don't own them,''
said Mr. Wien, who is the chief United States
strategist at Morgan Stanley Dean Witter.

Such startling immediate returns have attracted the
attention of individual investors, who now clamor for,
and get, a piece of the action and often resell, or
flip, the shares they buy within days, even hours.
While company insiders are usually barred from selling
newly issued shares for a certain period -- often six
months -- outsiders face no such restriction.

So great is the demand that services have sprung up to
keep investors posted on the latest news about public
offerings and established brokerage firms are changing
their businesses to cater to people who want to use
computers to actively trade these and other stocks.

Yesterday, Merrill Lynch introduced an online trading
service that promises investors a chance to buy new
shares, but officials of the firm said they were still
trying to decide how to deal with customers who flip
them, a practice the firm has traditionally frowned
upon.

Other firms, like Charles Schwab, are trying to find
ways to get more shares of newly public companies into
the hands of small investors before the stocks start
trading.

Mr. Browning has bought and sold 20 new offerings this
year, never holding one longer than three weeks,
through eight online trading accounts at four
different brokerage firms.

All that flipping has brought Mr. Browning a profit
before taxes of more than $30,000, he said, adding
that he has made at least $10,000 more this year
trading other stocks. The sum falls well short of the
$80,000 he earned at his old job, a salary he has
found difficult to replace in the Allentown area.

But Mr. Browning said he had lost money on only three
new offerings he had been able to participate in.
Using two computers to monitor the I.P.O. sections of
the World Wide Web sites of E*Trade Group and three
other online brokerage firms, Mr. Browning vies with
thousands of others, usually in electronic lotteries,
for as few as 100 shares at a time.

E*Trade and other members of a new breed of electronic
brokerage firms, including Wit Capital Group and
FBR.com, use these small allotments of I.P.O.'s as
enticements to customers. Old-line investment banks
have begun to include these upstart firms in
distribution of new issues to whet the appetites of
individual investors for the stocks they underwrite;
the underwriters have also opened up the offerings
because managers of some of their client corporations,
especially Internet-based companies, insist on making
some shares available to investors electronically.

Executives of young companies have also come to regard
a big first-day jump in the price of their stock as an
invaluable promotional event, even though such run-ups
suggest that the company could have sold its stock for
much more money.

On various electronic message boards and chat rooms
dedicated to stock trading, dozens of speculators can
be seen exchanging information and strategies for
getting shares of companies poised to go public. At
least two services have been created this year to
cater to these online speculators, offering to alert
them instantly to the latest opportunities for a
monthly fee.

Richard Mehta, an investor in Sunnyvale, Calif.,
estimates that at least 200,000 people are trading
initial offerings electronically. He is trying to
capitalize on the strong demand by selling a service,
eWebWatch, that notifies people, by e-mail message,
telephone or beeper, as soon as one of four online
brokerage firms posts new information about a planned
offering. In two months, more than 200 people have
agreed to pay $6 to $9 a month for the service, Mr.
Mehta said.

''I could see it in my circle of friends,'' Mr. Mehta
said. ''None of them were into I.P.O. trading, and
then, in the last couple of months, six or eight of
them are into it.''

Investors are drawn by two beliefs, he said. The first
is that shares of new stock are inexpensive; the
second, and more important, is that they are as close
to a sure thing as an investor can find.

''People think there is a very minimal risk in buying
100 shares at $10,'' Mr. Mehta said. ''That's the
logic people use in the I.P.O. market: 'Hey, I have
nothing to lose.' ''

What they have to lose, of course, is whatever they
invest; stocks can lose their entire value. Mr. Wien
of Morgan Stanley Dean Witter said that the current
mania reminded him of the late 1960's, when a booming
market for new stocks and stocks of small companies
culminated in a long market downturn.

''Right now, it seems like a sure thing and sure
things sometimes continue for a while,'' Mr. Wien
said. ''But they don't last forever.''

Still, the view that prices of brand-new stocks are
more likely to rise than fall is not groundless. In
fact, that is how investment bankers on Wall Street
designed the process.

Traditionally, underwriters tried to determine what
mutual fund managers and other big investors thought a
company was worth, then priced its shares 15 percent
or 20 percent lower. The strategy was to set the stock
up to ''pop'' higher in its first day of trading, a
rise expected to make company executives and their new
shareholders happy and to create demand for future
stock sales.

Stockbrokers distributed shares to their best
customers, treating them as a perquisite that should
be tucked away, not quickly resold. For individual
investors, flipping new shares was a no-no. Brokers
made it clear that investors who repeatedly flipped
were unlikely to get more.

To reinforce that policy, big brokerage firms have in
some instances refused to pay commissions to brokers
for selling shares of initial offerings if their
clients resell the shares too soon.

For example, last month Merrill brokers learned that
they would be penalized, through the loss of
commissions, if their customers were deemed to have
flipped shares of TC Pipelines L.P., a Canadian
oil-pipeline partnership. The stock, which went public
on May 28 for $20.50 a share, barely rose above its
offering price before sliding downward, closing
yesterday at $16.

Even Merrill cannot exert that degree of control in
dealing with online investors. One feature of
Merrill's new online service is access to initial
offerings the firm underwrites. Sometime next year,
Merrill plans to start holding lotteries that will
give online investors a chance to buy 100 shares of
I.P.O.'s.

''As of now, we don't plan to place any restrictions
on when and how you sell'' any shares of an initial
public offering bought through an online lottery, said
Madeline Weinstein, a senior vice president at
Merrill. But, she said, that plan could change if the
firm's brokers object. ''This is an issue for us.''

Even firms that have been built in recent years around
the idea of changing the ways of Wall Street are
grappling with how to deal with I.P.O. fever. Ron
Readmond, co-chief executive of Wit Capital in New York, said that the firm has a policy of penalizing
customers who buy shares in new public offerings but
do not hold them for at least 60 days. But, he
admitted, because of the complicated process of taking
orders for I.P.O.'s, some investors do manage to get
in on them shortly after flipping others.

Brokerage executives also find it harder to argue that
flipping is harmful or irrational in the current
market environment. Few of them will criticize an
investor for selling a stock for $50 a share on the
same day it was bought for $20.

''In a more rational world, stocks don't come out at
20 bucks and go to 50 bucks,'' said David Pottruck,
co-chief executive of Schwab in San Francisco. Schwab
has teamed with two electronic brokerage firms to
create an online investment bank that hopes to
distribute as much as half of the shares in the
initial offerings it underwrites to individual
investors, compared with the usual allocation of 20
percent to 30 percent.

Mr. Readmond thinks that the electronic revolution in
the financial markets will lead within 18 months to a
50-50 split of new public shares between individual
and institutional investors. When that happens, he
said, the initial gains in those stocks will start to
subside, as underwriters learn to gauge better how
individual investors will react.

In the meantime, traders like Mr. Browning say they
will continue to try to exploit the cracks in the
system that let them profit handsomely from new stock
offerings. Mr. Browning has had online debates with
other I.P.O. traders who support no-flipping rules as
a needed damper on the volatility of new-stock prices.


''Personally, I don't have a problem with flipping,''
Mr. Browning, who is 43, said. ''I'm providing the
company that's doing the offering with the capital
they want. What I do with the stock thereafter should
be of no concern to them.''

Despite the success he said he had had trading
I.P.O.'s, Mr. Browning acknowledged that in most
cases, he would have done even better if he had held
the stocks longer.

Take his experience with Red Hat Inc., a software
maker. Mr. Browning said he sold 100 shares of Red Hat
for $43 each, or a total of $4,300, in their first day
of trading in August. That gave him a pretax gain,
after commissions, of $2,805.

Not bad. But if he had held those shares through
yesterday's trading on the Nasdaq stock market, they
would be worth more than $21,000.