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Recently in Salon Technology

Red Hot
The open-source movement basks in the glow of a successful IPO for Red Hat, the first Linux company to go public.
By Andrew Leonard
[08/12/99]

Column
Don't link or I'll sue!
"Deep linking" lawsuits threaten everything that makes the Web work right.
By Scott Rosenberg
[08/12/99]

Artists do the rights thing
The Web gives bands like the Beastie Boys a place to market music and merchandise -- but only if they can hold onto their digital rights.
By Janelle Brown
[08/11/99]

Silicon Follies
Silicon Follies
Chapter 43: Geek apocalypse: Four days to ship, and the bugs are everywhere.
By Thomas Scoville
[08/11/99]

Software that writes software
Genetic programming is the new frontier: A human creates the environment, and a computer hacks the code.
By Alexis Willihnganz
[08/10/99]

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Typically the final share price for an IPO is set the day prior to the start of trading, which gives investors and brokers some time to reassess and prepare. That would have put pricing on Tuesday. Tuesday passed without any word of a fixed price; instead we received warning of a price range change: an increase to $12-$14 per share. E-Trade accompanied this news with a cryptic note: If the IPO priced above $10-$12 a share, E-Trade would require would-be investors to go through all of the offer paperwork again. This baffling requirement came with no explanation at the time. Most investors had explicitly stated an upper limit to their conditional buy offer --- 1,000 shares at up to $15 a share, for example --- and so had already specified (they thought) their opinions on a price increase.

The next morning, at 10:05, E-Trade announced that Red Hat was pricing at $14, and that it required everyone to resubmit their offers. But less than 40 minutes later, E-Trade announced that the "window had closed" and it was no longer taking resubmissions. Anyone who wasn't online to receive the warning was just plain screwed.

Predictably, hackers phoned E-Trade and complained. We learned several things. First, we were officially now considered members of an "affinity" program (not developers, or coders, or even the old "open-source community directed shares program members"). Second, E-Trade was not in the habit of telling you anything useful unless you talked to an E-Trade staffer directly. The message declaring that the time window for resubmission had closed was the last public information that the supposedly Internet-savvy E-Trade posted on its Web site. And the "Smart Alert" e-mail sent out by E-Trade to tell investors about the new resubmission requirement was in most cases received by users after the window had already closed.

If you were a loyal, frequent-trading, ordinary member of E-Trade just trying to get in on an IPO, you were out of luck at this point. Unless you caught the 40-minute window, your previous planning was for naught. Caveat emptor.

But if you were an "affinity" member, it was all right. Not that you knew this, of course. E-Trade could take your reconfirmation over the phone ... but only if you had already been told that it was taking such reconfirmations over the phone. I had been online when the first resubmission window opened, and I phoned E-Trade immediately. I reconfirmed my conditional offer and reassured the apparently forgetful E-Trade system that I hadn't changed my mind about $14 being a fine price to purchase the stock. I then posted to Slashdot to tell others the secret. And I took a deep breath.

Red Hat stock began trading an hour later, around 12:30 p.m., at an opening price of $46, a steep gain from the initial $14 price. I sat at my terminal, vainly trying to do real work, as the stock price initially dived. At $40 it leveled out.

At 1:17 p.m., I received another "Smart Alert" from E-Trade: "We were unable to allocate shares. Possible reasons: Offering priced above limit or high demand for shares."

So I'm a loser. Great.

I called E-Trade to find out exactly why I was being denied shares. I had to tell folks something when they asked -- I'd been talking about this all week. The E-Trade rep wasn't able to tell me. No one knew anything.

I changed my strategy. At 1:32 p.m. I decided to place a buy for 50 shares of Red Hat at the current market price: $46.56. I didn't care any more about getting in on the bottom floor. I just wanted to hold some Red Hat stock for the long term. Unfortunately, at the $40-plus price, 50 shares was all I could afford. But I got 'em.

A few minutes later, I surfed over to Slashdot.org to commiserate with the other unlucky E-Traders. Soon a disturbing pattern began to emerge: We couldn't locate a single person who had been allocated shares. The E-Trade documents stated that shares would be distributed "width-wise"; that is, everyone in the affinity program would get 100 shares before anyone got 200. But not one person had reported receiving even 100 shares. Something smelled fishy.

Next page | Can an IPO pull the free-software community apart?