Read this then I'll tell you what I think.
>>Staff Reporters of THE WALL STREET JOURNAL
Internet-related stocks were more resilient than Internet trading firms themselves.
Small investors pulled the trigger on Internet stocks early in Wednesday's wild trading session, on a warning from a top Internet stock analyst and jitters that Brazil's economic problems and currency devaluation would drive down the overall market. Their instincts were right -- at least for an hour or so. The Dow Jones Industrial Average fell as much as 261.58 points and the Nasdaq Composite Index was down even more steeply on a percentage basis.
But even as many Internet stocks -- and the overall market -- bounced back to repair much of the price damage, online trading itself was a problem.
Many investors were unable to sell stocks at favorable prices, as online trading firms struggled under record-breaking volume. Some small investors counting on using the Internet to make quick profits in the price swings found themselves handcuffed.
Web message boards were full of complaints all day about Web service at major online brokers, including E*Trade, Waterhouse Securities and Ameritrade Holding.
Waterhouse and Ameritrade acknowledged some problems with their systems, while E*Trade didn't respond to requests for comment.
Meanwhile, trading circles were buzzing with rumors about large bets against Internet stocks that were placed in recent days by George Soros's Soros Fund Managment and Julian Robertson's Tiger Management. At least one theory for why the market bounced back in midmorning: reports of buying by big hedge funds to "cover" at least part of their short -- or bearish -- positions in the stocks. Officials at Soros and Tiger declined to comment.
The Internee's "little guys," who have watched some of their stocks triple in price in recent months, are also finding this week -- as some of the air has begun to leak out of Internet stocks -- that a down market can be especially unkind. Not only are they running into a host of problems at online-trading firms, but they are also confronted with the fact that illiquidity in the stocks, as market makers pull in their horns, can dry up, leaving them at an even bigger disadvantage than big investors who are able to pull strings on Wall Street.
"I'm sitting in amazement," said Marty Cunningham, head trader at Charles Schwab's Mayer & Schwitzer, which processed a record 100,000 Internet trades in the first hour of trading Wednesday. "We're doing the best we can," he said. Schwab has been sending out the message to its customers for several weeks not to expect heroic execution when it comes to the most-volatile Internet stocks, which figure prominently on Schwab's list of such "fast market" stocks.
The problem for Schwab and other dealers is that turning a profit can be nearly impossible when a stock is racing up 30 points in five minutes. Many Nasdaq Stock Market dealers are frustrated with their inability to trade the Internet stocks, and some are starting to drop out. At the end of this week, Bernard Madoff Investment Securities will stop trading three Nasdaq Internet stocks, Amazon.com, Yahoo! and Infoseek.
"The fact we're dropping out [of these stocks] sends a message," Mr. Madoff said, pointing out that his firm is one of the largest traders in Amazon. "I don't like to see this type of activity. Eventually, if this bubble bursts, I think that people will be left holding the bag. I don't want to be around when that happens." Bear Stearns has also dropped trading in CMGI, an Internet holding company in which Bear did about 8% of the trading last month.
But the technical problems were causing the most outrage among retail Internet investors. Customers of some Internet brokers had trouble placing trades because of the sky-high trading volume. When Dave Howard, a technical engineer in Northern California, logged onto E*Trade's site before work Wednesday to close out a short position in index options, he was greeted with a message that said: "This service is temporarily unavailable." He was able to sell his "put" options over the phone, he said, but only after several unsuccessful attempts and busy signals.
Some options traders are also feeling the pain from the Internet-stock volatility. About 10 independent traders have had to leave their trading posts in options on stocks like Yahoo, Amazon.com and Onsale, mostly because they are taking positions that get hurt as volatility increases, traders say. ''It's been absolutely brutal,'' says Jon Najarian, president of Mercury Trading, a Chicago options-trading firm.
In some instances Wednesday, individual investors couldn't even take the first step toward the exit. Customers at Waterhouse's WebBroker, a unit of Toronto-Dominion Bank, found its service was shut down twice in the past two days because the systems were overloaded.
A Waterhouse spokeswoman acknowledged that the company's WebBroker service was completely out of commission for an hour. "We have had reports that a lot of people at other times were having problems," she said. Waterhouse encouraged customers to place trades over the phone, although investors at various firms complained of waiting anywhere from 15 minutes to an hour for a live customer-service representative.
Other individual investors who could place trades online did so only with difficulty. "It's been nasty," said Marjorie Young, an ex-schoolteacher from Kerrville, Texas, who now trades stocks full-time through accounts at Ameritrade and Discover Brokerage Direct, a unit of Morgan Stanley Dean Witter.
Ms. Young placed only three trades Wednesday, less than her usual eight or so. Discover's site was down at one point, she said, and it took her almost an hour to get a trade confirmation back from Ameritrade. That threw a wrench in her normal, rapid-fire daytrading style, because she often buys a stock and sells it 15 minutes later. "You don't dare sell something that you don't know you have," she explained.
Behind many of the technical problems in Wednesday's Internet trading were decidedly low-tech efforts by dealers to protect their own firms' capital while executing customers' trades during periods of extreme volatility. When stocks are rising or falling 10 points in a minute, that can cause big gaps in prices as traders attempt to position themselves.
A panel formed by the Nasdaq Stock Market has been studying the extraordinary volatility in Internet stocks for several weeks. The committee met Monday for more than two hours, but didn't come to a conclusion about how to reduce the volatility. The group is "trying to make progress, but there are no simple solutions," said one trading desk manager who attended the session.
The committee has discussed the controversial idea of halting trading in particularly volatile Nasdaq stocks during the trading day. Last week, Nasdaq took the unusual step of halting trading in Internet video provider Broadcast.com. The stock, which was soaring at the time, was allowed to reopen only after the company established that it had no pending news to release that day.
Wednesday Broadcast.com stock got hammered by the expiration of a "lockup" period that had barred some insiders from selling. Internet experts say other Internet stocks, including eBay and GeoCities, may face similar pressure when their lockups expire in the near future.
This week, Datek Online, a large electronic broker, had record volume of 67,174 trades in one day and the Nasdaq market last week had several billion-share days.
As for the stocks themselves, many staged impressive rallies Wednesday after opening sharply lower as big investors got word that one of Wall Street's top Internet analysts, Morgan Stanley Dean Witter's Mary Meeker, was advising clients to lighten up on their Internet holdings.. In Nasdaq trading, Amazon finished down 15 3/8 , or 9.4%, at 148, after falling as low as 125 in early trading. Yahoo fell to 332 before finishing at 368, down 34, or 8.5%. |
