To all - O.T. -- NYT article about online brokerage woes lately.
January 25, 1999
Online Trading Woes Ruffle All Sides in Deals
By RICHARD A. OPPEL JR.
Many small investors are becoming frustrated with the limitations of
stock trading over the Internet, even as they continue to pour money
into the online brokerage firms that now account for one of every
four retail stock trades.
But the same trading frenzy that is causing headaches for them is also causing
trouble for market makers -- the professional trading firms that match buyers
with sellers or take the other side of trades themselves -- forcing them to
change their procedures to keep up. Some have quit trading the most popular
stocks of online investors or shut their automatic trading systems, delaying
orders by up to 20 minutes.
Meanwhile online brokerage firms are continuing to
have problems like Web pages that are slow to load,
servers that conk out and some trades that fail to be
executed.
Trying to cope with the turmoil, some brokerage
firms like Waterhouse Securities Inc. are requiring
online investors to make trades in the most volatile
stocks by talking to a broker instead of using a
computer. Many firms, including Charles Schwab
Corp., the online trading leader, have limited or eliminated the ability of
customers to own some of their stock through margin loans. And others are
scaling back the aggressive advertising that industry analysts say has
contributed to the Internet logjam.
Still, investors and some industry officials worry that a big market tumble
could completely freeze out online traders.
"If on normal days this doesn't work at all, that's a bad enough problem, but
whenever there is a big downdraft on the market, a lot of people are going to
be shut out," said Steve Salgo, a computer programmer in Plano, Texas, who
trades stock options from his home. He said he has changed online brokers
eight times in hopes of improving performance, but things only got worse
during the last few weeks. "Most of the time there is a slow response. And
then sometimes there is no response."
But Bernard Madoff, whose firm Bernard Madoff Investment Securities is one
of the largest market makers, said, "This thing is not going to stop until people
start losing money. I've never seen this type of mania, people trading 100 and
200 shares without any regard to fundamentals." Attempting to address the
extreme volatility in some stocks and initial public offerings, a special Nasdaq
committee of market makers, brokerage firms and other industry officials will
meet again Monday to discuss whether to recommend any trading-rule
changes to the Securities and Exchange Commission.
Already, the group has suggested extending the time market makers have to
post prices before an initial public offering begins trading, but the SEC has not
acted on the recommendation.
Other ideas under discussion include allowing Nasdaq officials to temporarily
halt trading in extremely volatile stocks and requiring retail customers buying
shares immediately following an initial public offering to place limit orders that
guarantee they will not be filled at a price far higher than they expected to pay,
according to a person involved in the discussions.
Analysts predict investors will see more
Internet delays this week, even though
popular high-flying stocks with online
traders like Amazon.com Inc. and
Yahoo Inc. have now fallen more than
30 percent from their highs two weeks
ago. But some industry officials say the
stunning rise in online trading volume this year has begun to level off.
Still, "I think it's going to take a slowdown in the market in combination with
more infrastructure spending to turn this around; that will take months," said
John Robb, co-founder of Gomez Advisors Inc., an Internet consulting firm
in Concord, Mass. He said online brokerage firms' failure rates -- the number
of times Web pages failed to load -- rose 63 percent in the first week of
January, compared with the average rate during the third quarter of 1998, and
he said the situation has not improved since.
At Waterhouse, Web trading went down for about 35 minutes on Tuesday
and another few minutes Wednesday, said John Chapel, the company's
president. For the time being, the firm has cut back advertising and prohibited
trading in 10 stocks through its Web site, including Amazon.com and Yahoo.
The firm has eliminated margin borrowing for the same 10 stocks, meaning
customers who call Waterhouse to place a trade in those stocks must cover
the entire price of their purchase with money in their accounts.
The temporary measures will be reversed when "the frothiness lifts," Chapel
said.
The number of online trades has held steady at Discover Brokerage Direct
after jumping more than 20 percent at the beginning of the year, said Tom
O'Connell, executive vice president. "We are looking at this as our new level,"
he said. The firm, a unit of Morgan Stanley Dean Witter & Co., has eliminated
all margin lending on 16 stocks, up from just two issues six weeks ago.
The problems have spilled over to Nasdaq market makers, and at one point at
least 16 had stopped trading Amazon.com, Madoff said. Many that continue
to trade the most volatile stocks have removed them from their automated
trade systems and are executing them by hand, causing trades that normally
take two to 20 seconds to take up to 20 minutes, he said. His firm has
temporarily stopped trading Yahoo, Amazon.com and Infoseek Corp., though
it is still averaging about 125,000 trades a day in other issues.
While the most extreme volatility may have abated somewhat, industry
analysts expect online trading growth to continue to surge throughout the
year. Online trades now account for 25 percent to 30 percent of all retail
stock trades, double their market share a year ago, according to Gomez
Advisors. The firm expects the number of online brokerage accounts to top
10 million by the end of the year, up from 6.8 million at the end of 1998.
Copyright 1999 The New York Times Company |
