HI,
this actually a message to every one on the site. i was just found it and thought it might be of interest.
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Friday March 17, 6:47 pm Eastern Time
worldlyinvestor.com Region of the Day
Maybe It's Time to Re-Dial Your Broker
By Bob Beaty, Canada Columnist
Online discount brokers are becoming a victim of their own success. Get an emergency plan.
It's annoying when a company is a victim of its own success. Seems investors who have swamped online discount brokers of late are now complaining the dealers' systems can't handle their business.
This phenomenon isn't confined to Canada; there are folks grousing all over. Setting aside the old chestnut, ``You get what you pay for,' companies such as TD Waterhouse (NYSE:TWE - news) are definitely feeling the heat. (Disclosure: TD Waterhouse is a subsidiary of Toronto Dominion Bank, whose venture capital subsidiary, TD Capital, is an investor in worldlyinvestor.com.).
But the real problem seems to be a public that has subscribed to the siren's song of ``do-it-yourself-and-trade-your-way-to-financial-independence.' And it's a sign that there is a tsunami ahead as volumes increase and investors become even more rabid to participate.
Irrational Exuberance at Work
Just as market valuations have gotten ahead of all rational, fundamental measures, so too have the volumes and the expectations placed on discounters. Sure, these companies should be able to service their clients. That is the most basic tenet of success. But, no one could see this coming.
Officials at TD Waterhouse are accelerating the hiring and training of new people and bolstering technology. And, executives are manning the phones with a ``swat-team' approach during volume spikes.
Even the venerable Toronto Stock Exchange (TSE) now breaks down under the strain of millions of small trades placed in large part by folks who are merely hoping to ride the tidal wave of exuberance -- and wanting to do it as cheaply as possible. In every print or TV ad, companies such as Waterhouse have added volume disclaimers to their promotions.
In other words: Caveat emptor. Most discounters are not actively recruiting new clients until the current problems are addressed. The next step will likely be the suspension of opening new accounts.
TD Waterhouse trades around US$18, down from its initial level of US$27 when it debuted last June. Off its low of US$11, the current travails may affect reputation, but are not likely to hurt earnings to any great extent. There will always be a large pool of new clients, especially if these markets continue to rise.
Doomsday Scenario The part that I don't understand is this: If customers are placing unrealistic demands on discounters now, what happens when the market corrects? No doubt that phone-in and online brokers could come close to collapse as customers trample each other to rush out the door.
Busy signals, Muzak and interminable site-loading waits could become the only contact customers can achieve with discounters in a massive market rout. Liquidity has always been the problem in market corrections and, neophyte investors are likely to be stymied by systems that just can't handle everyone going one-way, as lemmings over a cliff.
A Parachute Investors, instead of carping about poor service, should take steps to protect themselves against volume spikes that will only make the problem worse. Discounters can only exist on a best-efforts execution basis. If investors want more surety of execution, perhaps, dare I say, they might want to rekindle a relationship with a full-service broker, most of whom will cut a decent execution-only deal, if that's what you desire.
Investors might also want to look into the stock/index put market, either short-term or leaps, to add an insurance component to a portfolio that depends on nimble execution to survive or be profitable. Paper profits don't count. Never did, never will.
To investors who trade in or out on a whim, especially those who depend on margin: Give yourself a bit of a shake. While most discounters have tightened up margin requirements, leveraged traders without a plan in an unforgiving market could be headed for unintentional financial disaster as your discounter indiscriminately sells out your best positions to cover a rising margin debt.
Discounters are merely a tool, not the answer. Identify that there are drawbacks and put together a disaster plan while there's time. You might be too busy, or in touch-tone hell, later.
Bob Beaty is worldlyinvestor.com's Canada Editor. He worked for 20 years in the brokerage industry, in both Canada and the UK. Now primarily Internet-based, he has written extensively on stocks, bonds and market-related issues for a variety of Web sites. His column suggests investment and trading opportunities in the Canadian market. He does not own stocks in any of the companies mentioned.
Go to www.worldlyinvestor.com to see all of our latest stories.
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