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Online Investors Adapting Quickly

In the process of learning not to rush, people are, of course, leaving a little skin on fortune's wheel.

If someone asked me what has made this IPO market different than any other, I would have to say that it is the presence of the online individual investor. Before the individual IPO buyer was allowed on the scene last year, the IPO market was a relatively closed community made up almost entirely of professional traders, portfolio managers and rich sophisticated investors.

What this salty crowd possessed, and what the small investor had yet to acquire, was a clear understanding of how Wall Street works. This knowledge of the game is based on experience, and is what allows the pros to exploit the IPO market and win big. Without this industry know-how, an individual has less than a fair chance of surviving, let alone making a profit. There is no other sector of investing where being "the fool" is more dangerous than in the equity syndicate market.

Knowing this, and knowing that individuals have been flocking to IPOs in record numbers, worries me more than a bit. But, what has surprised me is how quickly the online investor has adapted to the landscape and learned to play the game. Of course, not without first leaving a little skin on fortune's wheel.

Early in this cycle, it was an almost daily occurrence for a hot IPO to double or triple from its issue price. What drove these deals to ridiculous premiums were hordes of online buyers placing orders to buy the stock at the market, on the opening tick. A market order like this can be filled at whatever the price that is currently being asked for stock at the time the order is executed.

In a fast market, like those that exist when a hot IPO opens for trading, the stock's bid and asked prices are literally chaos. Market orders can be filled at prices that are 5, 10 even 20 points away from the previous print. Scary? Oh yeah. The market on open order, when used to buy into a white-hot IPO, can spell disaster for an unwary investor. Just ask the poor person who paid 97 for shares of TGLO just moments after that stock opened for trading. TGLO never saw a level even close to that again. Ouch!

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When the "time and sales" record of the first few minutes of trading for a newly minted IPO is filled with 100 to 500 shares and prints at higher and higher prices, this is an indictor that small investors are rushing in to buy on market open. This feeding-frenzy-like environment provides IPO sellers (which are temporarily in short supply) a small window of time where almost any stock offered will get taken, and the prices paid will almost certainly be laughed about over drinks later that day.

What I am saying is that the individual investor, climbing over the backs of the crowd to buy into a hot deal, is the fuel for many of these rocketship openings we see. What has changed -- and what might explain the recent decline in opening premiums -- is that the individuals doing the buying have either been wiped out or, more likely, have learned not to rush and be the fools.

In the last month, I have seen fewer and fewer deals explode out of the gates at their opening, while a growing number of IPOs are slowly bid up over the course of the day. This, I think, is a result of a more sane approach to the IPOs by online buyers in the aftermarket. This is a healthy thing and ultimately will allow more individuals to remain in the game.

Let's take a look at this week's offerings.

Ben Holmes is the founder of, 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