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When Will Brokerages Catch Up With the Internet Age?

In a speech at Columbia University, the trader advocates a new kind of IPO.
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Editor's note: The following is the text of a speech delivered at Columbia University on April 3, 2000.

When will the brokerage business -- the business that has done the most to promote, defend and further the Web through incessant underwritings -- succumb to the Web's greatest attraction: the ability of its customers, at last, to name their own prices?

Let's think about this. Let's take a mythical company,

National Gift Wrap & Web


Cramer Brothers

wants to bring this company public. The company has great buzz; it is a sort of paper exchange that allows merchants from all over the country to select their boxes and bags and gift wrap online.

The word is out that this company has explosive growth and it was heavily sought after as an underwriting. Even though we all know this company is going to go out at a huge premium, Cramer Brothers first comes up with a $10 to $12 pricing. Cramer Brothers then sends National Gift's management on a 27-city tour. For four weeks the company is management-less as it hawks the merchandise, its own stock,

even though it knows the deal is already spoken for.

By the time the management comes back from the European portion of the tour, the offering gets bumped to $13 to $15. The U.S. roadshow begins and we begin to see heated interest among the biggest funds. They all are indicating that they want 10% of the deal.

The company goes to Boston; the price gets bumped to $17 to $18. As the price goes up, people get even more excited, and now it goes to $19. New York beckons. A huge slate of one-on-ones with management, a breakfast and a lunch and the next thing you know, the stock is going public at $19.25.

Of course it opens at $60. The roadshow correctly got the institutions involved, but they are no longer in charge of the underwriting.


, which batches all of the public's orders, is. The market buyers come in and set the real opening. All of the institutions that wanted stock at $20 have no desire to hold on at $60. They all flip.

The stock begins its long sickening ride down. And it still hasn't bottomed.

What should have happened? Simple: Cramer Brothers should have told the story, the roadshow, online, using streaming video or a channel devoted to nothing but these meetings. You watch it at home or at the office at your leisure. You have a question? Management holds a series of world-wide online chats.

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When pricing comes, you put it all on the Web. In fact, you rent



patented model and you put in bids online.

The management of the company looks at all of the bids and tries to come up with a level that it will take as many as possible without giving the company away. If demand is so great, it calls a Web audible and issues more shares. If demand then drops, it cuts down the number of shares. All of this can happen in a matter of days if not hours.

The result, you have no flippers, a level playing field and a shareholder base that gets what it bargained for.

Why has this not happened yet? This underwriting process is the single most lucrative part of the brokerage business, a business increasingly dominated by 6 cents for everybody -- except for underwritings, where 80 cents to $1 can get eaten by the underwriters. For what? For exciting too many people? For creating a stampede effect? For selling something that would sell itself?

The lucrative nature of the process, though, makes it something that can't be sacrificed by the industry. Worse, companies don't come public often, they only do it once. So prospective users are too one-off to band together and fix it. The cachet of dealing with a top brokerage firm keeps the best IPO candidates from embracing an alternative.

This process would be cheap and efficient and allow management to stay at work during a crucial period for the entity's business life. It would allow for equal access to the process.

Of all the different uses of the Net to cut costs, it would seem that this name-your-own-price method for underwritings would be one of the single-most efficient, least costly method of floating shares.

But entrenched interests won't let it happen. What will it take to make it happen? I fear that it might have to be mandated. There simply isn't enough constituency right now to switch to this cheaper, more rational pricing model. But when it happens, the business world should welcome it as something that should have happened the moment we began adapting the Web. Ultimately, can we afford


to do it this way?

Thank you.

James J. Cramer is manager of a hedge fund and co-founder of At time of publication, his fund had no positions in any stocks mentioned. His fund often buys and sells securities that are the subject of his columns, both before and after the columns are published, and the positions that his fund takes may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Cramer's writings provide insights into the dynamics of money management and are not a solicitation for transactions. While he cannot provide investment advice or recommendations, he invites you to comment on his column at