BAD NEWS! Smith Barney latest to raise Internet share margins
By Jack Reerink
NEW YORK, Dec 1 (Reuters) - Salomon Smith Barney has
become the latest brokerage to require customers who bought
Internet stocks with borrowed money to put up more cash, in a
sign that even brokers find it tough to stomach the wide price
swings of these securities.
Salomon Smith Barney, a unit of financial services firm Citigroup Inc.(NYSE:CCI - news), follows
several online brokerages in raising margins on Internet stocks, or the amount of money a customer
needs to have in his or her account to cover stock purchases or sales.
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 does not pay up
and a forced liquidation fails to cover the investor's debts, the brokerage can get stuck with the bill.
Salomon Smith Barney now requires customers to back up their holdings in some 15 Internet stocks
-- including cyberspace retailer Amazon.com (Nasdaq:AMZN - news), and online auctioneers
eBay Inc.(Nasdaq:EBAY - news) and Onsale Inc. (Nasdaq:ONSL - news) -- by 40 percent in
cash, instead of 30 percent. One of the firm's spokeswomen declined to comment on Tuesday,
other than to say the change took effect on Monday.
Boosted by demand from investors desperate to buy into the Internet gold rush, stocks of Internet
companies recently have shot up sometimes more than 30 percent, or tens of dollars, in a single day.
But they can also come crashing down, as shown by the wild price moves that occurred on
Monday. Onsale's stock, for example, opened at $106.38, plummeted 55 percent to $48, and
closed at $61.50 that day.
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 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
(Toronto:TD.TO - news), has raised maintenance margins on some Internet stocks, a
spokeswoman said last Wednesday.
The measure, which applies to high-flying stocks of companies such as eBay and Internet services
firm EarthWeb Inc.(Nasdaq:EWBX - news) 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.
An informal survey of other brokerages showed that some, such as Merrill Lynch and Co. Inc.
(NYSE:MER - news) and Charles Schwab Corp. (NYSE:SCH - news), have left their margin
requirements unchanged, while others have adjusted them.
For example, Fleet Financial Group's (NYSE:FLT - news) 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 last week. But a spokeswoman of the regulatory arm of the National
Association of Securities Dealers (NASD) on Wednesday said 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 last week. An SEC spokesman declined
to comment.
More Quotes
and News:
Amazon Com Inc (Nasdaq:AMZN - news)
Charles Schwab Corp (NYSE:SCH - news)
Citigroup, Inc (NYSE:CCI - news)
EarthWeb Inc (Nasdaq:EWBX - news)
eBay Inc (Nasdaq:EBAY - news)
Fleet Financial Group Inc (NYSE:FLT - news)
Merrill Lynch & Co Inc (NYSE:MER - news)
ONSALE Inc (Nasdaq:ONSL - news)
Toronto-Dominion Bank (Toronto:TD.TO - news)
Related News Categories: US Market News |
