To all:
FWIW, an excerpt from tonight's Money Daily report on the internet trading activity.
For an enhanced HTML version of the Money Daily,
visit moneydaily.com.
Tuesday, October 28, 1997 8:50 p.m. EST
Oh the deals!
by Michael Brush
Just imagine: Intel Corporation for $69 a share -- a
stock that has traded recently near $100 and closed
Tuesday 23% higher than that at $85. Dell Computers on
sale at $73, even though it changed hands for over
$100 just days ago, and closed at $91 Tuesday.
In short, the bargains were mouth watering. Too bad
most small investors couldn't get at them.
The reason: Just when you needed your brokerage most
on Tuesday morning, it was probably unavailable --
phone lines frozen by a frenzy of calls from excited
bargain hunters just like you.
Investors were furious, and rightly so.
"I wasn't able to buy anything as prices firmed up,"
wrote "Tony C." Tuesday morning in a Silicon Investor
(http://www.techstocks.com/) chat group called E*Trade
Sucks!. "It is pathetic."
"I was ready to participate in a turnaround, but Datek
has completely locked me out," complained another
investor. "It isn't just e.Schwab that is down," wrote
yet another. "Everything is down including their phone
lines."
Spot checks of 26 online brokerages by Money magazine
between 10:30 am and 12:30 pm showed the problem was
widespread. But oddly, while many of the big-name
brokerages were impossible or hard to access, several
of the smaller, lesser-known outfits almost instantly
produced cheery voices ready to take orders.
Brokerages e.Schwab www.eschwab.com, E*Trade
www.etrade.com, Dean Witter Discover
www.deanwitterdiscover.com and Waterhouse
www.waterhouse.com, for example, were virtually
inaccessible for large stretches of the morning. It
was impossible to log on to their web sites, and
investors got busy signals on the phone. At firms
like Wall Street Electronica www.wallstreete.com, Wall
Street Access www.wsaccess.com, SmartTrade
savoystocks.com, J.B. Oxford www.jboxford.com and Net
Investor www.pawws.com/Broker/How, meanwhile, reps
were ready to take an order in under two minutes.
Results ran the gamut at brokerages in between.
What went wrong?
In short, brokerages understandably had not
anticipated the avalanche of volume that produced a
record 1.2 billion shares worth of trading on the New
York Stock Exchange, and 1.36 billion shares worth --
also a new high -- on NASDAQ.
"Yesterday and today were extraordinary," says Glen
Mathison, a spokesman for Charles Schwab, the only one
of the three brokerages we contacted that returned our
calls. "I don't believe anybody in the industry had
planned or tested capacity at these volumes. We are
sorry that not every customer could get through. We
will be looking into what we can do to prevent that in
the future." Dean Witter Discover and E*Trade did not
respond to requests for comment on this story.
Mathison says Charles Schwab had three times the
normal level of phone traffic at regional call
centers. At times, it had ten thousand Web investors
signed on to its site at the same time, compared to a
normal average of around 175.
"It really is too bad," said Frank Zarb, the chairman
of the National Association of Securities Dealers
(NASD) in an interview on CNBC. "Because of all the
players in this entire enterprise, the one you want to
get through is the small investor. It is just too
bad."
Too bad?! Wait a minute. What about the missed
profits? Intel at $69! Isn't there anything investors
can do?
Write a letter
The short answer: You can complain, but don't expect
to recover any money in a legal proceeding.
"It was an off-the-charts kind of day, an aberration,"
explains J. Boyd Page, an attorney with the Atlanta-
based Page & Bacek, which often represents investors
against brokers. "The brokers will argue 'You can't
really expect us to bear the expense to plan for an-
off the-charts type of day. We could not justify that
to our shareholders." And they probably would win.
"The brokerage has an obligation to have reasonable
facilities," agrees Stephen Friedman, a securities
lawyer with Debevoise & Plimpton in New York. "And
there are times when those facilities don't give you
what you want. But I don't think it is negligence or
breach of fiduciary duty. It is a question of what is
reasonably foreseeable and what level of facilities
you have to maintain. If they have acted recklessly,
then there may be the beginnings of something. But
that is going to be hard to show"
Nevertheless, investors who are peeved about missed
profits may find that the most productive thing to do
is complain. "This could be a basis on which broker
dealers could be disciplined either by stock exchanges
or by the NASD," explains John Coffee, an expert in
securities law who teaches at Columbia University law
school. As "self regulatory organizations," the NASD
and the stock exchanges have the duty of regulating
many activities of the market. NASD, for example,
handles complaints about brokers.
The SEC, which oversees the NASD and the exchanges,
also responds to complaints about brokers. "We suggest
people put their complaint in writing, address it to
the compliance officer at the firm and send copies to
the SEC, NASD, and possibly the state regulator," says
an SEC spokesman (for addresses, see below).
Angry investors who still want to go the legal route
should keep the following points in mind:
* Under the so-called "shingle theory" in law, anyone
who hangs a shingle out advertising services implies
that they maintain industry standards. Along those
lines, the NASD, which regulates brokers, requires
that they follow "just and equitable principles of
trade." In essence, brokers are not allowed to
deviate from industry standards. "But you will only
win if there was a clear departure from established
norms," says Coffee. Investors can call the NASD at
212-858-4400 for the information and forms needed to
file to begin an arbitration proceeding.
* You have no recourse under federal antifraud
provisions set up by national securities laws. "The
problem is that there is no way to prove the amount of
the losses," explains Coffee. "Rule 10b-5 (the
antifraud provision of federal securities law) does
not permit antifraud suites on the basis of claims
that an investor would have done this or that. This is
the kind of context where people have a tendency to
fabricate the extent of the trade they wanted to make.
So there must have been an actual trade."
Here are some contacts if you want to file complaints:
Office of Investor Education and Assistance
Securities and Exchange Commission
Washington, DC 20549
You should also contact your local NASD office. To
locate it, call 800-289 9999, or visit the NASD
website (www.nasdr.com). |
