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Online Brokers 2000: IPO Policies Leave Investors Hungry

Beth Kwon

The flood of initial public offerings continues to rise. The total approached $8 billion in February, and when the March tally is completed, bankers figure the total will exceed $11 billion. April could bring another record if, as expected, AT&T's wireless spinoff raises as much as $11.5 billion. With so many shares being floated, you might think that access to IPOs via online brokers is improving.

Think again. Although ordinary investors often dream of making a quick killing when an IPO takes off, the chance to get in on one remains slim indeed. Despite the record volumes, demand for shares of hot new issues such as the recent Palm (PALM) offering remains intense, and most shares go to large institutions and major investors, leaving few shares for retail customers. While the average investor in TheStreet.com's Online Broker Poll 2000 did not rate access to IPOs a top priority, it is a big deal for many active investors. (To see complete results of the 10,000-reader survery, please see previously published stories in the Online Brokers 2000 package).

Many online brokerages say they are trying to make IPO shares more widely available to their customers.

Online Broker Survey 2000 In Today's Package Getting In on IPOs Real-Time Quotes Reliability -- Getting Better Investing Styles Calendar of Stories Message Boards

Judging from the comments from the 10,000 readers who voted in TheStreet.com's Online Broker Survey 2000, such efforts are long overdue. Investors -- especially those with smaller portfolios -- say they feel they're being cut out by a system that allocates shares only to the wealthy and well-connected, leaving only crumbs for the public. "The present situation is tantamount to the hidebound practices of medieval guilds," wrote one frustrated respondent.

Broker What you need Allocation process What it gets you DLJdirect $100,000 minimum account Depends on relationship with DLJdirect, IPO investing history and other factors Deals from more than a dozen investment banks including DLJ, Goldman Sachs and U.S. Bancorp Piper Jaffray E*Trade Enough to cover the cost of shares Random distribution Deals from more than a dozen banks including E*Offering, Credit Suisse First Boston and Robertson Stephens Fidelity $500,000 minimum account or at least 36 trades a year Depends on relationship with Fidelity Lehman Brothers, Friedman Billings Ramsey and WR Hambrecht deals Source: Online Brokerages

Broker What you need Allocation process What it gets you Morgan Stanley Dean Witter $100,000 account minimum "based on a proprietary matrix" MSDW deals Merrill Lynch $100,000 account minimum Lottery system Merrill Lynch deals Suretrade Dependent on certain criteria, including the type of investor you are Lottery system Wit Soundview, Robertson Stephens and Prudential deals Source: Online Brokerages

In many cases, respondents who gave their brokers high marks overall cited IPO service as a weakness. "I have been very happy with Fidelity with the exception of their IPO availability," wrote Jeff Gillette. "It stinks, and their policy for allocating shares to the small traders is also below my expectations." Fidelity spokesman Jim Griffin says Fidelity allocates shares based on the length and type of relationship a customer has with the firm.

Fidelty wasn't the only brokerage attacked for its policy on allocating shares. Nearly all of the brokerages got negative comments -- about allocation policies and the high account values required to participate -- often $100,000 minimums.

Broker Score DLJdirect 10.48 E*Trade 9.43 Fidelity 5.51 Schwab 4.23 TD Waterhouse 2.85 Ameritrade 2.34 Datek 1.61 Scale of 0 to 30. League A brokers received more than 650 votes each. League B brokers received between 72 and 312.

Some readers also complained about trouble getting shares even after qualifying. Indeed, once you qualify for IPOs, getting the shares isn't always straightforward. You may need to baby-sit your email to make sure you don't miss critical notifications. If you don't respond in time, you're out. One reader shared this confusing email issued in connection with the Palm IPO. Fido's response: "This did not affect how IPO shares were allocated. It was a duplicated email that went out and was a mistake on our end."

So, how do IPO policies vary among online brokers? DLJdirect (DIR), which topped the League A brokers in this category, offers deals underwritten by 13 investment banks, including Donaldson Lufkin & Jenrette, Goldman Sachs and U.S. Bancorp Piper Jaffray. Of the League B brokerages, Morgan Stanley Dean Witter (MWD) ranked highest for IPO availability; that firm offers deals from its own investment bank.

E*Trade ranked second in IPO availability among TSC's League A brokerages. (League A brokerages received more than 650 votes, while League B brokers received between 72 and 312. See our methodology story.) Readers praised E*Trade's no-minimum policy: Investors must simply have enough money to cover the purchase. E*Trade distributes shares based on a lottery system and has access to IPOs from more than a dozen investment banks which, over the past 18 months, have supplied shares in 180 IPOs through the online broker.

Nevertheless, E*Trade got flamed for actual availability. "IPOs at E*Trade are almost impossible to obtain now (even the dogs are hard to get)," wrote a respondent.

"I would encourage them to keep trying," says the spokeswoman. "The IPO business is very hot right now, and it's one of those things where supply is always going to exceed demand."

Broker Score MSDW 10.96 Merrill 8.13 Suretrade 3.63 NDB 2.99 Quick & Reilly 2.70 Dreyfus 1.92 ScoTTrade 1.67 Brown 1.50 AmEx 1.25 Vanguard 0.53 Scale of 0 to 30. League A brokers received more than 650 votes each. League B brokers received between 72 and 312.

Not surprisingly, the TSC survey shows that many daytraders -- defined as those who make five or more trades daily and hold shares for less than a day -- view IPO availability as a vital factor in choosing a broker, compared with investors who trade less frequently.

Online broker Wit SoundView actually pioneered the concept of selling IPOs online, and it scored accordingly in the survey. However, it didn't make the list of League A and B firms because so few respondents chose it as their primary brokerage. Some respondents said they chose Wit expressly because of its IPO services. "Wit ... is only good for getting IPOs," wrote one respondent.

Overall, respondents agreed that the availability of IPOs is a feature that brokerages need to work on, and that limited access is unsatisfactory. In the words of one, "IPOs should be open to any and all comers. ... Serious elitism is happening in this arena."