Schwab: Net-Stock Volatility Is Hurting Investors
The online broker's co-CEO wants the NASD to institute trading halts in
overly volatile issues
Charles Schwab, founder of the world's largest online brokerage firm, is concerned
about what he calls the "fast market" -- and he wants the NASDAQ to do something
about it. "I'm a little ticked that the NASD [the National Association of Securities
Dealers] has not taken a role in smoothing things out," Schwab told Business Week
Online in an exclusive interview.
Schwab, who is now one of two chief executives of San Franciso-based Charles
Schwab & Co., sees trouble brewing in the extreme price fluctuations and heavy
trading of a small number of Internet-related stocks -- especially Internet IPOs. His
concern: Price movements in some stocks are so extreme and so fast that retail
investors are getting hurt. As Schwab says in a letter to investors that will be posted on
the company's Web site on Jan. 22, "you could place a trade at a projected price of $10
and end up paying $40. It can and does happen."
The NASD, says Schwab, should halt trading just like the New York Stock Exchange
does, when price movements get so volatile. Without such trading halts, customers
suffer inaccurate price quotes, get orders executed at prices different from the ones
that have been quoted, and experience delays in trade execution, Schwab says. "In
some ways, these are not fair or orderly markets," Schwab told Business Week Online.
Much like circuit breakers on the New York Stock Exchange, "the NASDAQ should
adopt circuit breakers on an individual issue basis," says Schwab. "When there is a
huge imbalance of orders, the market should be shut down."
Schwab's letter to customers explains the difference between a "limit order" and a
"market order," and encourages customers to place limit orders in fast markets. A
limit order "establishes a buy price at the maximum you are willing to pay, or a sell
price at the minimum you are willing to receive," Schwab says in his letter. A market
order is an order "to buy or sell as stock at the best price available at the time the
order is executed...these orders typically assure a fill, but not a specific price." Such
an open-ended order in fast moving markets can mean big losses for investors.
By Leah Nathans Spiro in San Francisco
EDITED BY DOUGLAS HARBRECHT _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _
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