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Small Investors, in Two Camps, Driving Internet Mania


As the recent hyperactive moves in stocks like, Infonautics and AvTel Communications amply demonstrate, individual investors are increasingly trying to strike it rich in extremely risky stocks.

Trading patterns in these Internet-related stocks show that small investors, rather than institutions, are behind the bulk of the action.

"It's the individual investors driving a lot of the small-cap stocks and Internet stocks sharply higher," said Dick Green, chief executive of, a Web site catering to active small investors.

But while the overall activity of small investors is telling, there are two distinct groups involved: those trading independently from their homes or offices, often via personal computers; and those sitting in front of souped-up computer terminals at professional "day-trading" outfits.

The number of do-it-yourself investors has, of course, proliferated in recent years. Many trade via discount brokers over the Internet and are glued to CNBC-TV for continuous market updates.

Day traders, by contrast, have far more powerful trading systems that provide a key additional layer of information--including a list of pending buy and sell orders for a given stock at any moment.

Though both groups are comprised of aggressive individuals, each group has different trading patterns. And those patterns have distinctive effects on the prices of the stocks involved.

Consider the recent activity in, a start-up firm that helps people set up World Wide Web pages.

The company's initial public stock offering, or IPO, was priced last Thursday at $9 a share.

But when the stock began trading on the open market Friday, the first trade was at $90 and the price quickly peaked at $97.

The stock trended lower through the day and closed at $63.50 on Nasdaq--still up 606% from the IPO price, making it the biggest opening-day rise ever for an IPO.

In's case, hungry small investors--not day traders--appeared to play the key role in pushing the stock up 10-fold at the open, experts said.

In the case of a hot IPO, many individuals put in so-called market orders to buy the stock when it begins trading. That's an order to a broker to buy shares at the prevailing market price, however high it might be.

Seeing a backlog of buy orders, Wall Street brokerages that make a market in's shares were able to open trading at what now looks to many investors to be an outrageously high price.

While individual investors' orders drove that stock up, professional day traders were relatively uninvolved. Though some trafficked in the stock, their numbers appeared small in relative terms, experts said.

For example, Landmark Securities, a large day-trading firm, accounted for a scant 76,000 of the 15.7 million shares of The that traded Friday. All of those day traders combined made a net profit of about $22,800 in the stock, said Michael Green, head of Landmark's Santa Monica office.

Day traders normally look to play intra-day trends in stock prices, or simply to profit from small differences in "bid" and "asked" spreads. Mostly, they seek to close out every position by day's end.

The trend in was down for most of Friday, after it peaked at $97. Normally, day traders might play a downtrend like that by "shorting" the stock, which is a bet that the price will continue dropping.

But market rules prohibit shorting of an IPO in its initial trading. Thus, "IPOs are really tough for day traders like me to play," said Mark Brandon, principal at Daylight Trading in Glendale.

Added Ray Johns, senior market editor at the Web site: "I don't know who in their right mind was paying $90 for [] on the first day."

But the action in another Internet-related stock--Infonautics--appeared to suit many day traders quite well on Friday.

The stock leaped $3.25 to $5.63 on sudden interest in the firm's information-search product. While individual amateur investors undoubtedly helped bid up the price, day traders also were very active.

Of nearly 25 million shares that changed hands, day traders at Landmark alone were responsible for more than 1.2 million, earning a combined net profit of almost $87,000, said Green.

As Infonautics climbed strongly in the opening 90 minutes of the day, day traders piled in, he said.

But in some hot stocks, trying to tell who's more responsible for price action--amateur individuals trading from home, or individual day traders using high-speed systems--can be difficult.

For example, almost 5.8 million shares of AvTel Communications traded on Monday, as the price plunged $20.50 to $10.50 on Nasdaq after soaring last week on hype over its Internet access service.

Of the 12,189 total Avtel trades counted by Bloomberg News on Monday, 80% were for 500 or fewer shares and another 15.1% were for between 501 and 1,000 shares.

Because institutions normally trade much larger share blocks, all those trades are likely to have been made by small investors.

But whether they were by amateur individuals or by day traders isn't readily apparent. Although day traders often trade in blocks of 1,000 shares or more, market conditions sometimes don't allow for bigger blocks, and day traders may have to play in smaller lots.

Overall, day traders' new influence shows up in the emergence of so-called electronic communication networks. These are alternative trading systems that compete with the Nasdaq market and New York Stock Exchange.

In the first quarter of 1997, all ECN volume came from a pair of ECNs used almost exclusively by institutions, according to ITG Inc., a New York firm.

But by the third quarter of this year, ECNs used heavily by day traders had 23% of ECN volume.

Walter Hamilton can be reached by e-mail at

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