Flippers: In The Shadows Of Wall Street

The Northwest Airlines Inc. initial public offering on Mar. 17 was not exactly a scorcher. Originally expected to be priced between 19 and 21, it was offered at 13 and immediately traded down to 127 8. But that didn't deter one flipper, a professional who buys IPOs at the initial offering price and tries to sell them in the next hours or days for a quick profit. He bought several thousand shares of Northwest at the offering hoping it would reach 131 2 in a few days, a modest 5% profit. He also had another goal: ingratiating himself with his broker. "I bought it because it will help me get other things," says one flipper. "Maybe I can buy myself a friend."

Unlike big institutional IPO buyers, flippers operate in the shadows of Wall Street. They spend much of their time trying to outwit antiflipper maneuvers by brokerage executives, who contend that flipping disrupts offerings. For that reason, flippers remain secretive and unwilling to be quoted by name. Flippers are also called hedge funds, but are not to be confused with big-time money managers.

BREAKING RULES. Many flippers are ex-brokers who have an insider's view on how to navigate the market. They tend to be one-man bands who operate out of their homes, work their quote machines, and play with perhaps $500,000 of their own money. Some function on a grander scale, investing upwards of $30 million of other people's money. Estimates of their numbers range from 200 to several thousand.

Flippers get IPOs by reaching through cracks in the system, often dealing with brokers willing to flout their firms' antiflipper rules. Flippers keep the brokers happy by generating lots of commissions. Says the flipper: "I am a sweetheart of an account. They'll give me merchandise before they give it to other customers."

To increase their chances of getting stock, flippers may have a dozen or more brokerage accounts at various firms and offices around the country and even multiple accounts at one firm. "The perfect [flipper] has a broker in every branch," says Dennis O'Connor, a former Merrill Lynch & Co. broker.

On a typical day, a flipper will look at the calendar of IPOs that are expected to be priced that day. By calling around to brokers, he will select the most promising offering. In one week in February, one flipper made $1,500 on six IPOs and lost $1,000 on another, an offering for Playtex Products Inc., a Merrill Lynch deal. A one-man shop may do 4,000 to 6,000 trades a year.

The hot IPO market has made many flippers very rich. "It has been a no-brainer for two years," says the flipper. "Just sell it within 72 hours. Maybe seven days, if you really like it." But now the IPO market is running out of steam, perhaps just temporarily, and the brokerage industry's campaign against flippers is getting tougher. Most firms no longer let customers have more than one account. Institutions still play the IPO market with impunity, but the flippers' chances for big gains may be shrinking. "It's the whore and madonna system," gripes the flipper. "We're the whores, and the institutions are madonnas."

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