Stop me before I trade again
pathfinder.com
Find out why some online brokers are quietly
reigning in their best customers.
-- By Borzou Daragahi
You're trading fast and furious with your online broker. But
just about every trade you place drags you deeper toward
the nadir of financial ruin. Maybe you trade too frequently,
follow rumors, or heed bad advice. Like the bartender who
gently suggests that maybe you've had enough martinis for
the night, will your broker alert you before you fall into
oblivion?
Most Internet brokers have declined to take on such a role.
But some have quietly built in warning mechanisms (outside
of calls for settling margin accounts, which jeopardize the
bottom line of the brokerage as well as that of the investor)
to let investors know they're in trouble.
DLJ Direct, for example, sends a warning letter or e-mail to
an investor who has lost a certain amount of money.
Charles Schwab monitors its customer's trading activity and
might call someone who's has suddenly increased his or her
trading volume. And though it doesn't intervene in its
customers' trading, National Discount Brokers does provide a
link from its web site to a service that helps compulsive
online investors.
Until now, online brokers have not had to bother with all the
investor suitability requirements of their full-service
brethren. But they are starting to pay attention, even as
Federal regulators are edging toward more strictly regulating
online brokers.
This week the Securities and Exchange Commission released
the a 115-page report recommending that online brokerages
better scrutinize the suitability of investments for certain
investors, as well as taking other steps that benefit online
traders. Still, the SEC acknowledged in the report that
"online customers do not want registered representatives
interfering with their trading."
By contrast, full-service brokers have long been obligated to
keep an eye on their client's portfolios. Prudential
Securities, which charges investors a fixed percentage of
their assets rather than commissions, calls investors who
appear to be in trouble, whether they opt to trade online or
not. "There is a menu of actions that might trigger the firm
to make a call," said Susan Atran, a spokeswoman. "If we
see that a client is making investments that are
inconsistent with their stated goals, or if we see some kind
of excessive options or commodities trading, or a steep loss,
you would get a phone call from someone you know."
Online brokers that specifically cater to hyperactive traders
also have systems in place to alert clients suffering steep
declines. "When a customer has a loss [exceeding] a certain
threshold, they hit speed bumps," said Mark Stryker, CEO of
CyberCorp, an Austin, Texas online brokerage. "Those speed
bumps are opportunities for awareness and intervention by
the staff."
If any of CyberCorp's 2,000 customers suffer a one-day loss
of 10% or more, they receive an e-mail. If the loss exceeds
20%, they receive an instant message through their
browser. Anything more than a 25% decline triggers a phone
call to the client.
Schwab, the leading online broker, says it screens incoming
orders based on certain criteria, which may change day to
day, such as the number of trades or the total cost of the
trades. If something unusual starts happening in a
customer's account, someone will give that customer a call.
"There is a software system in place," said Sarah Bulgatz, a
Schwab spokeswoman. "We try to catch irregularities on the
front end."
On the other hand, some online brokers say that a warning
alert Cybercorp's or Schwab's might insult their customers'
sense of rugged individualism, and even frighten
libertarian-minded netizens ever wary of Big Brother. "Most
of the investors that we've got and that I talk to are very
self-directed," said Gregg Sharenow, the co-COO of NDB. "A
lot of people may not appreciate a broker contacting them
and getting in between their strategy."
Most discount online brokers also say they're in the business
of placing trades, not giving advice. "Since 1975," an
Ameritrade spokesperson said, "we've not made any
recommendations as we've executed trades for self-directed
investors." In other words, trader beware.
Investors who don't have access to a coddling broker can
institute their own warning mechanisms by going to free
sites like Strategy.com, which lets you set up phone, pager
or e-mail alerts corresponding to dips and peaks in your
portfolio. Most investors would probably do well to heed the
words of SEC Chairman Arthur Leavitt, who asserted back in
May that "investor protection--at its most basic and
effective level--starts with the investor." |
