Waterhouse Bans Web Trades Of Some Bulletin Board Stocks
By STACY FORSTER
THE WALL STREET JOURNAL INTERACTIVE EDITION
If you're a customer of TD Waterhouse and like to trade OTC Bulletin Board
stocks in your online brokerage account, you may be in for a bit of a surprise.
Just ask Joe Prugh.
He recently tried to sell a block of shares in an OTC Bulletin Board-traded
stock through Waterhouse (www.waterhouse.com), but when he tried to
confirm the trade all he received was an error message telling him he couldn't
trade the stock electronically. So, he contacted Waterhouse's customer
service by telephone.
After consulting with a representative, he was shocked to learn the brokerage
firm had instituted a new policy that bans online trading in certain OTC
Bulletin Board stocks. The OTC Bulletin Board is an electronic quotation
system that is operated by the National Association of Securities Dealers,
which also runs the Nasdaq Stock Market.
Mr. Prugh, who hails from Stafford, Va., says Waterhouse never notified him
about the change in policy. Waterhouse, the online brokerage arm of
Canada's Toronto-Dominion Bank, says it instituted the new policy the first
week of March to restrict online trades of certain thinly-traded OTC Bulletin
Board shares in an effort to protect customers from price volatility. The list of
companies that are restricted is available on Waterhouse's Web site.
The new policy also could hit investors' pockets. In order to buy or sell OTC
stocks through Waterhouse, customers must place a trade with a broker over
the phone. The broker-assisted rate cost $45, as opposed to $12 through
Waterhouse's online-trading system, WebBroker.
Waterhouse has taken heat in the past from customers who complain about
waiting 45 minutes to an hour to speak to a customer-service representative.
With the rapidly changing prices of some OTC Bulletin Board shares,
investors could be out of luck if they have to wait that long to place an order.
John Chapel, an executive vice president at Waterhouse and head of U.S.
operations, says Waterhouse's call-center capacity has improved and
customers now may spend only five minutes waiting to place a trade.
At the time he called Waterhouse, Mr. Prugh says he was incorrectly
informed by a representative that Waterhouse customers were banned from
trading all OTC stocks online. In actuality, says Mr. Chapel, the ban only
affects 36 of the nearly 5,000 OTC shares traded there.
Waterhouse says it is making an effort to notify customers of the change
through its Web site, when they place their orders and when a customer
contacts an associate. Mr. Chapel attributes the confusion in Mr. Prugh's case
to kinks in a new system and miscommunication between customers and
customer-service representatives.
Like many complaints about online brokerages, word about Waterhouse's
new policy quickly spread through Internet message boards, and many
customers aren't happy about the change.
"I'm upset that they will not allow me to sell existing positions," wrote one
participant on a Silicon Investor message board devoted to Waterhouse
customer service.
By forcing customers to go through a live broker, Waterhouse says,
customers can receive up-to-date quotes on the rapidly changing prices of the
stocks on the restricted list.
"We needed to step in and protect the customers to ensure they're getting the
best information possible when making these trades," says Lou Giacalone,
head of Waterhouse's risk-management department.
The reputation of OTC Bulletin Board stocks has been battered in recent
years amid accusations of fraud and manipulation. OTC Bulletin Board
companies usually are too small to be listed by a recognized exchange, such
as the New York Stock Exchange, or quoted on Nasdaq's national or
small-cap markets. Trading in most OTC Bulletin Board stocks is dominated
by individuals because institutional investors, such as pension and mutual
funds, often are prohibited by their charters from owning issues that tiny and
illiquid. And because the shares have small floats and trade for less than $5 a
share, they are prone to volatility and easily can be hyped and manipulated.
Analysts suggest Waterhouse is making a smart move by looking out for their
customers in what is becoming an increasingly risky and speculative market.
"Some investors will argue that they're being shut out, but [Waterhouse is]
trying to protect the investors and themselves," says Dan Burke, an analyst at
Gomez Advisors, based in Lincoln, Mass. He says investors are better served
by being aware of this risk and knowing the potential for rapid swings in
prices of these shares.
Surprisingly, it's exactly this reason that has attracted speculative investors to
the thousands of stocks that currently are traded on the OTC Bulletin Board.
The OTC Bulletin Board reported record volume of 24.2 billion shares traded
last month, soaring from 5.2 billion in February 1999. Dollar volume of
trading also is rapidly expanding, reaching $24.6 billion in February compared
with $3.9 billion in the year-earlier period. The Nasdaq Stock Market
recorded an average of 1.8 billion trades a day in February, compared with
1.2 billion trades a day on the OTC Bulletin Board.
"OTC Bulletin Board stocks had become very popular and very volatile and
subject to broad movements without merit," Waterhouse's Mr. Chapel says.
Clark Yingst, vice president and market analyst at Prudential Securities, says
his firm has seen "frenzied and unprecedented levels of activity in the Bulletin
Board stocks over the last few to several weeks," including trades made by
some of the firm's most conservative clients. "Based on our experience, that's
a sign of an unhealthy willingness to speculate," he says.
The stock Mr. Prugh was attempting to sell, 21st Century Technologies, a
Fort Worth, Texas, firearms-technology company, is one of the 36 stocks
that Waterhouse has identified as volatile and has banned from trading online.
Waterhouse says it has no plans to greatly expand the universe of stocks on
the list. The brokerage firm will make decisions about which stocks to add or
remove from the list based on information it receives from market makers --
the traders who maintain bid and offer prices in a given security, Mr. Chapel
says.
Mr. Chapel looked at a positive side of the new policy. He says the most
up-to-the-minute information about a share's price can't be provided online
because of the nature of the OTC Bulletin Board, which isn't automated and
therefore doesn't provide real-time quotes.
"When a customer is out there buying on the Internet, [he] may not be as
familiar with a OTC Bulletin Board stock," Mr. Chapel says. "When we take
a customer off-line, we also tell them about the risks inherent in trading these
kinds of stocks. We do a lot more for our customers than is necessary
because it's in their best interest."
But Mr. Prugh resents the move. "To take a particular stock out of the air and
say, 'O.K., we're not going to trade this particular stock.' I'm not sure how
that can protect a customer," Mr. Prugh says. "[If they're going to do it], they
need to take the whole family of them. Almost every [OTC Bulletin Board
stock] is as volatile as the ones we're trading."
Mr. Prugh says he's received no response from Waterhouse to his complaints
about the policy, and he's planning to transfer all of his assets to another
discount broker that will allow him to make online trades of OTC stocks.
He's likely to find one. E*Trade Group, Fidelity Investments and Charles
Schwab, Waterhouse's biggest online rivals, all say they haven't experienced
problems providing real-time quotes for OTC Bulletin Board stocks, nor do
they have similar policies in place that restrict trading in these shares.
Mr. Chapel says Waterhouse is investigating Mr. Prugh's case and will
contact him shortly.
Mr. Burke of Gomez Advisors says although Waterhouse is the only online
brokerage to change its policy for trading OTC Bulletin Boards, it's likely that
others will soon follow. "At some point it comes down to a business decision,"
he says.
Write to Stacy Forster at stacy.forster@wsj.com |
