Online Firms Are Making Good on a Promise

As a result, they are experiencing incredible growth.
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Buying IPOs online isn't always an easy process. This week we look at two online firms' syndicate allocation processes and ask the question: Is it worth the effort?

I've been in the IPO trading game for a long time now, and I've seen a lot of changes. Late last year when the e-firms crashed the syndicate party by offering IPO shares to their online trading customers, I gave their efforts little more than a nod of acknowledgment.

Now, as we head into the tail end of this year's second quarter, I have to say that not only are the online firms making good on their promise of "IPOs for the little guy," but they are experiencing incredible growth as a result. I make it a point when talking with subscribers to the

ipoPros.com service to ask about their experiences with the online firms and their respective syndicate operations. I will ask which firms they are going to for stock, how they are being treated and generally how they feel about the experience. The answers are often interesting, sometimes entertaining and almost always enlightening.

Most of the folks I talk to will list either

E*Trade

or

Wit Capital

as a consistent source of IPO allocations. Usually these users will follow with criticism of the email or Web site based notification systems used by these firms. One common complaint about E*Trade is that it updates a page on its Web site to alert investors of IPOs that are available for purchase. These updates seem to come at all hours, and once the announcement is posted, it is a race to enter an indication of interest, or IOI, which is a conditional offer. Under this system, only the quick get stock. Those not glued to their screens go hungry and are shut out of the allocation process.

One investor I spoke with has gone so far as to build a Web tool using JavaScript that monitors changes in the alert page on E*Trade's Web site. When an update is made to the page a routine sends a message to the man's cell phone. "The script just refreshes the page over and over, looking for changes in the source code each time," explained the investor who asked to remain anonymous. "I had to do something besides sitting at my machine all day waiting for updates. I wasn't getting any work done."

Any mention of Wit Capital's syndicate operation will almost always be accompanied by a critique of its email-based alert system. Investors who register with Wit and indicate an interest in IPOs will receive regular email alerts about IPOs available through Wit. These emails carry a subject line that looks like this: Subject: IPO Alert:

Rubio's Restaurants

Inc. available through Wit Capital.

The emails contain a message in the body that describes the offering. The description will contain the deal terms, a list of underwriters and a live hyperlink to a page on Wit's Web site, where investors can enter an indication of interest. The whole process seems very convenient, but when talking to investors who use Wit, known in online trading circles as Witters, a number of complaints arose.

First on the list is the timeliness of the email alerts. Those involved with Wit often complain that the alerts come at all hours and without warning. Other, more aggressive Witters have learned to prowl the Wit Web site between the hours of 4:30 and 5:30 p.m. EDT, where the alerts are sometimes posted hours before investors receive an email alert.

Once an email alert is received, an investor must go to the Wit site by clicking on the link embedded in the alert. Once at the site, the user then enters an IOI and is given a confirmation number. These numbers are issued in sequence and are often passed around in online investor chat rooms and compared with those numbers received by other investors. A low number serves as proof of an investor's quickness and will garner words of praise from those who's response time placed them farther back in the queue.

Once an investor is given an allocation by Wit, he is sent a confirming email which he must then respond to by sending yet another email, the subject line of which must contain the words, "I confirm." If an investor fails to reply to this confirmation email, any allocations will be pulled away and the investor gets nothing. I have heard from at least one person who said that one confirmation message was delivered to his email account at 1:30 a.m. EDT, hardly a reasonable hour to be expected to respond.

In spite of their complaints, many of those who I spoke with did admit that the processes used by these online firms are fairly consistent and even-handed. When pressed to offer suggestions on how the e-firms could improve their service, few could come up with any advice. A spokeswoman at Wit Capital refused to comment on their allocation process, citing the quiet period mandated by the Securities and Exchange Commission. She did offer that Wit's process was, "purely first come, first served and is not based on either account size or investor net worth. All of our shares go to retail accounts."

Spokespeople from E*Trade did not return calls seeking comment.

Regardless of how investors view the e-firms it is clear that online distribution of IPOs will continue to grow and that individual investors will not willingly go back to being shut out of the game.

Let's take a look at the deals scheduled to price this week:

Ben Holmes is the founder of ipoPros.com, a Boulder, Colo.-based research boutique specializing in the analysis of equity syndicate offerings. This column is not meant as investment advice; it is instead meant to provide insight into the methods of new and secondary offerings. Neither Holmes nor his firm has entered indications of interest in any of the companies discussed in this column. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Holmes appreciates your feedback at

bholmes@ipopros.com.