nternet Craze Prompts Some Brokers To Up Margins
By Jack Reerink
NEW YORK (Reuters) - The wild
price swings in stocks of Internet
companies have prompted some
brokerages to require investors who
bought these securities on margin, or
with borrowed money, to put down more cash.
Boosted by demand from investors desperate to buy into the
Internet gold rush, stocks of companies such as cyberspace
bookseller Amazon.com recently have shot up, sometimes more
than 15 percent, or tens of dollars, in a single day. But brokerages,
worried by the wild price swings --known as volatility in the trade--
may dampen Internet stock speculation by tightening margin
requirements.
Under securities regulations, customers buying or selling stocks on
margin must put up 50 percent in cash or securities such as
Treasury Bills to cover the initial transaction's market value. To
maintain the position, however, they need to put up only 25 percent
of the holding's value, although most brokerages require a more
conservative 35 percent as a minimum maintenance.
Waterhouse Securities, a discount brokerage unit of Canada's
Toronto-Dominion Bank, has raised maintenance margins on some
Internet stocks, a spokeswoman said on Wednesday.
The measure, which applies to high-flying stocks of companies such
as cyberspace auctioneer eBay Inc. and Internet services firm
EarthWeb requires customers to have 50 percent in cash for
holdings bought or sold on margin, instead of 35 percent.
"Whenever we see a stock that has increased volatility, we take a
look at what is best for the firm and customer," the Waterhouse
spokeswoman said.
A random survey of other brokerages showed that some, such as
Merrill Lynch and Co. Inc. and Charles Schwab Corp., have left
their margin requirements unchanged, while others have adjusted
them.
For example, Fleet Financial Group's Quick & Reilly discount
brokerage arm has raised margins on stocks that have shown
increased volatility, a spokeswoman said. The move is standard
operating procedure for the brokerage, added the spokeswoman,
who could not identify the stocks affected by the measure.
Rumors about brokerages, and even regulators, tightening margin
requirements for trading in Internet stocks surfaced earlier this
week. But a spokeswoman of the regulatory arm of the National
Association of Securities Dealers (NASD) told Reuters regulators
are not about to meddle with margins.
"Any sort of change in the margin requirements would have to be
proposed to the (NASD) board and then sent on to the (Securities
and Exchange Commission), (and) we have nothing even under
consideration," NASD spokeswoman Nancy Condon said. An SEC
spokesman declined comment,
Investors who fall below margin requirements receive the infamous
margin call from their broker, who tells them to pony up more cash
or liquidate their stock position. If a customer doesn't pay up and a
forced liquidation fails to cover the investor's debts, the brokerage
gets stuck with the bill.
Internet brokerage AmeriTrade Holding Corp. recently wrote off
$1.6 million, in part because customers speculating in shares of
small companies went bust when some of these small cap stocks
plummeted over the summer.
"We have put in place better techniques to implement our (margin)
policies much quicker," said AmeriTrade's chief executive, Joe
Ricketts, in a brief telephone interview.
AmeriTrade requires maintenance margins of up to 80 percent for
stocks whose price "starts getting beyond anything that is
reasonable investment," Ricketts said, naming as examples stocks
that carry a price to earnings (PE) ratio of more than 25.
Analysts often use PE ratios, which are calculated by dividing a
company's stock price by its earnings per share, as a method of
valuing corporations.
Although Ricketts would not pinpoint stocks included in the firm's
80-percent margin requirement, Internet stocks are likely to fall into
the group because they often lack the second part of the PE
equation -- earnings.
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