Wash. Post article. Online Traders' Net Impact on the Increase
washingtonpost.com
By Leslie Walker
Washington Post Staff Writer
Friday, September 4, 1998; Page E1
Appearing on a CNBC financial
show Tuesday, stock analyst Bill
Burnham voiced kind words for
the online brokerage firm
E-Trade Group Inc., and the
company's stock jumped $1
within minutes. Burnham
concluded that the instant
reaction came from the growing
community of online investors
who were watching the television
show and tapped out buy orders
on their computers.
As Wall Street prices swung up
and down this week, Internet
investors were there in the thick
of it, buying and selling from
homes and offices. Many online
brokerage services reported a
doubling in the number of trades,
for a total of perhaps half a
million a day.
While their impact on the market remains small compared with that of big
institutions, at times online traders ticked the prices of individual stocks up
and down. Their role was particularly strong on technology stocks - many
online traders work for high-technology firms and favor putting their
money in that industry.
Steven Wallman, a senior fellow at the Brookings Institution and former
member of the Securities and Exchange Commission, said small investors
are a growing force because of their ability to get news instantly and trade
more efficiently, often through low-commission online services.
Peter Friz is a case in point. The 26-year-old Columbia man said he has
made about 20 transactions since he took his investing online two months
ago. With his old broker, Merrill Lynch & Co., he said, "I barely traded at
all because the commissions were so high."
"The new online world clearly has benefits - lower prices, more
information and more informed investors," Wallman said. "But there may
be turbulent times ahead until newly informed investors get their full
bearings in this new, empowered marketplace."
Some analysts believe online trading is altering the dynamics of how
individuals trade and helping to magnify price gyrations. "Online investors
do affect the market today," said Burnham, who is an analyst with Credit
Suisse First Boston. "They increase volatility."
To trade, online investors open an account with an Internet brokerage
service. They can monitor their portfolios' value minute by minute on their
computer screens and issue buy and sell orders. "You can often complete
a trade in 10 seconds," Burnham said. Internet traders pay lower
commissions, because no human broker is involved.
"The power that the individual investor has and the speed with which they
can execute trades now is unparalleled," Burnham said. "They are not very
far behind the institutions."
Many people who used to sit tight as the market headed up or down feel
empowered to get on the computer and trade, largely because they can
get information faster. They are plunging into the active-trading waters
where the swimmers typically have been institutions and wealthy people.
No one knows the total value of online trades. But market research firm
Forrester Research Inc. of Cambridge, Mass. estimates that one in four
retail stock trades are now made on the Internet. Three brokers alone -
Charles Schwab & Co., Fidelity Investments and Quick & Reilly Inc. -
have a combined total of 4 million online accounts. Many other firms offer
Internet trading.
Burnham said online traders made an average of 220,000 daily
transactions in the second quarter of this year. Both Schwab and Fidelity
reported that their Internet transactions doubled Monday and Tuesday,
with Schwab reporting a record 131,000 online trades Tuesday.
While visits to Fidelity's Web site rose only 50 percent Monday, the
number of "newbies" logging on to check their portfolio for the first time
doubled, a spokeswoman said.
The inevitable Web site glitches didn't seem to dampen the appetite for
trading online. Friz, for instance, was annoyed that his online portfolio at
the Ameritrade Inc. service crashed Tuesday, preventing him from
snapping up stocks he saw as bargains. But he remains an enthusiast.
"I wouldn't leave online trading," said Friz, who sat through an extended
wait to make a single telephone trade at Ameritrade. "I like it and think it
has a lot of advantages."
Ameritrade chief executive Joe Ricketts said the outages at his
Omaha-based company were brief and intermittent, despite a chorus of
complaints from users.
Most Internet trading sites fared far better this week than they did during a
slide last October, when many customers were unable to view their
portfolios or make trades. Gomez Advisers, a research firm, studied
response times at online brokers Tuesday and found a failure rate of close
to zero.
"This week investors could see their portfolios and what was happening,"
said Alex Stein, a principal in the firm.
Terrance Odean, a professor at the University of California at Davis, finds
the increased electronic trading worrisome because his research suggests
that the more people trade, the less they earn.
Odean recently analyzed trading patterns of self-directed investors at a
large discount brokerage house and concluded that investors tend to be
overconfident and trade too much. They lose money, he said, by
prematurely selling winners and belatedly selling losers - a trend he sees
the Internet exacerbating.
"When you make a lot of information available to people, it gives them an
illusion of knowledge that they probably don't really have," Odean said.
Not all investors become hyperactive online. Retired computer
programmer Kerry J. Carmichael of Tempe, Ariz., posts regularly on
Internet message boards and researches companies he owns but makes
few online trades with Waterhouse Securities Inc.
Carmichael, 50, says he remains "a buy-and-hold type of investor, not a
trader." The big change the Internet made to his strategy was by providing
fast news that made it easier for him to diversify. "Prior to using the
Internet, I was a one-song Tommy, investing only in Intel, my wife's
employer," Carmichael said.
Carmichael started a message thread on the Silicon Investor Web site this
week titled "Help, my stocks have fallen and they can't get up." He said he
values the boards because the opinions of other investors, not his own,
ultimately move markets.
c Copyright 1998 The Washington Post Company
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