Deals & Deal Makers

Cyberspace Helps Small Investors,
But Institutions Get the Top Access

By ALLISON BISBEY COLTER, LYNN COWAN and GASTON F. CERON
Dow Jones Newswires

NEW YORK -- With the click of a mouse, a small investor can now enter a stock trade as quickly as any sophisticated trader, get real-time equity research and watch a presentation for a new stock offering.

But cyberspace hasn't eroded the biggest advantages that have set institutional investors apart in the bricks-and-mortar world: personal connections, portfolio size and investing skill.

"I can sit down with the chief financial officer of any company in America, but a retail investor who has 500 or 1,000 shares can't call up the head of a large, Fortune 500 company," said Phil Schettewi, senior managing director and head of equity investments at Prudential Investments.

Teams of Analysts

The ability to pick up the phone and speak to a top executive is a huge advantage. At the very least, it gives institutional investors more insight about a company. They may also have the opportunity to get a jump on news. Add to that equation the teams of analysts that professional money managers rely on when deciding how to use information.

To be sure, small investors are the source of, and thus indirectly share in, the power of institutional investors such as mutual-fund and pension-fund managers because those funds often are aggregates of small-investor money. But an individual investor wanting to do his or her own investment research, rather than invest through such funds, is at a disadvantage to the big money managers.

"The advantage that institutional investors have and continue to have is access -- access to company management ... and access to analysts on Wall Street," says Bill Burnham, a partner at venture capital fund Softbank Capital Partners LP. "And they have that access because they throw a lot of money around."

Think access to research published by your online investment bank gives you the same information available to the man or woman who is managing the mutual funds in your 401(k) account? Think again. Those same portfolio managers know which Wall Street analysts are worth listening to, and more importantly, often receive blast voice-mail calls ahead of the research notes -- or can call the analysts and actually get to speak to them.

No Conflicts of Interest

Besides, few fund managers buy or sell stocks based on a recommendation from a securities brokerage firm. Instead, they rely on in-house analysts who are free of the conflicts of interest that many analysts from big brokerage houses face as their firms jockey for the next investment banking deal from the companies they cover.

"Hopefully, we're thinking different thoughts [and doing it] sooner" than Wall Street analysts, said Jim Fleischmann, research director at the Teachers Insurance & Annuity Association-College Retirement Equities Fund.

That doesn't mean sell-side research is completely useless. Mr. Fleischmann says these reports sometimes contain insight or just plain speculation about companies' strategic plans that can move share prices. But he says the information is disseminated to institutional investors so quickly that the market impact is almost instantaneous. Giving individuals access to the same research doesn't put institutions at any disadvantage.

In some ways, the glut of information now accessible through the Internet, such as Securities and Exchange Commission filings, product information and news reports, puts individuals at a disadvantage to institutions, who are in a better position to sift through it and decide what's really important.

"It used to be that only institutional investors were swamped with information, now everyone is," TIAA-CREF's Mr. Fleischmann said. "It's a high-class problem."

IPO Roadshows

Similarly, the latest wrinkle in online access-initial public offering "roadshows," in which management and bankers present information about a company coming to the public markets -- doesn't instantly put individuals on equal footing with professionals.

In the past, roadshows were open only to institutional investors or an investment bank's very wealthy private clients. Recently, the SEC gave online broker Charles Schwab Corp. permission to make them available to its wealthier and more active clients, and other firms expect to follow suit. But the most important aspect of roadshows -- attending the live event itself, rather than an Internet presentation -- is still closed to individuals.

"The problem with the online roadshows is that you don't get to meet and interact with the management team, which is really, to be honest, 80% to 90% of the value of a roadshow," says Mr. Burnham. He adds, "I don't think that it will ever eliminate the need for person-to-person meetings."

Trading may be the area where small investors have made the most strides to catch up with their professional counterparts. Besides being able to buy and sell shares cheaply online, individuals can now trade outside regular market hours on electronic communications networks, or ECNs, just as institutional investors have been able to for years.

Unexplained Stock Activity

Some institutional investors do find small investors' new trading access irritating, but it's more on the level of a pesky horde of mosquitoes marauding an angry bull. The effect of day traders on the market's movements is a constant source of irritation for professional traders and analysts, and for precisely the same reason that individual investors have long found unexplained stock activity frustrating: They don't understand what's behind it.

"Smaller investors can wreak havoc on the market," says Randall Roth, an analyst for Greenwich, Conn.-based Renaissance Capital Corp., the adviser for the IPO Plus Aftermarket Fund. "A lot of times individuals have the same access to information as the big guys, and what really matters is who can take advantage of that information first. But beyond that, just being able to interpret what it means is becoming harder and harder because momentum investors are just riling things up."

Another day-trading tactic that makes professionals grind their teeth at night is individuals' capacity to interfere with the execution of a big trade. Institutional investors often think long and hard before deciding to sell or buy a large block of stock, and until recent years, had only other mutual funds or big investors to worry about if information about their intentions leaked into the market.

Now, with the blossoming of gossip on Internet chat rooms and legions of small investors trying to outsmart everyone else in the market, there is a whole new cadre of people poised to ruin a trade by driving the price against a professional.

"Now there are so many forces of evil. These day traders are sitting in their bedrooms and kitchens making $50,000 a year and thinking it's the greatest thing in the world. My profession has been glamorized and glorified by the media," said Vincent Slavin, an institutional sales trader who tracks IPOs for Cantor Fitzgerald. "But it won't last. The market will turn, and the exit doors aren't that big."

Despite these annoyances, institutional investors generally welcome the democratic effect of the Internet on Wall Street, saying better informed investors make for more efficient markets. And the less mysterious the process of investing becomes, the more comfortable individuals are with the idea of owning securities.

"It's a great opportunity for the bulk of participants in the marketplace to understand the complexities of making investment decisions ... whether they want to do it [themselves] or not," Mr. Schettewi said.

Write to Allison Bisbey Colter at allison.bisbey-colter@dowjones.com¹, Lynn Cowan at lynn.cowan@dowjones.com² and Gaston F. Ceron gaston.ceron@dowjones.com³

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