N.Y. Examines Online Broker Delays as E*Trade Crashes
New York, Feb. 4 (Bloomberg) -- New York State's attorney general began an investigation of the online trading industry after ''dozens of complaints'' in the past month from consumers about delays in processing stock trades and Web-site crashes.
The action came as the trading system for E*Trade Group Inc., the No. 3 online broker, stopped for almost three hours.
''There are always risks involved in investing in the stock market,'' Attorney General Eliot Spitzer said in a statement. ''But part of the risk should not include questions about whether trades will be executed promptly or whether online brokerage firms can deliver the services that they've promised.''
Mouse-clicking investors, many of them buying and selling shares of Internet companies, have increased their online trades by an estimated two-thirds since October to more than 400,000 a day, analysts say. That's triple the level of 2 1/2 years ago for an industry that didn't exist five years ago.
Brokerages have had trouble keeping up. E*Trade's disruption was the third in two days. Ameritrade Holding Corp., the No. 6 Web broker, spent $2 million to add capacity in late 1998 after a series of outages.
''With these rapid volume increases coming over a short period of time, every time a bottleneck is fixed another one pops up,'' said James Marks, electronic commerce analyst with Deutsche Bank Securities. ''It's a continual process of problems being uncovered and fixed.''
Letters to Brokers
The New York State Law Department will send letters to several online brokerages this week asking that they provide documents, reports and ''other information regarding their services,'' said spokesman Scott Brown.
He declined to specify which firms, or how many, would be getting letters. The goal is to develop safety precautions to protect investors, who have complained about money lost because of poor service such as ''slow trades or no trades,'' he said.
Not being able to deliver promised service has hurt Internet companies in the past. In 1997, America Online Inc. took a $5.9 million charge and settled with class-action plaintiffs and 45 state attorneys general. The refunds went to customers of the online service who were unable to sign on when the company's $19.95 unlimited usage plan drew overwhelming response.
''It's eerie how this parallels the AOL case,'' said Steve Franco, analyst with Piper Jaffray Cos. ''The AGs had a feeding frenzy on the AOL thing and got a lot positive spin out of it.''
Marks at Deutsche Bank Securities said the state's attempt to regulate online trading companies was inappropriate.
''If they're unable to provide reliable service, their customers have a clear choice: close their accounts or go elsewhere,'' he said. ''The state should stay out.''
More for Less?
Online brokers charge 5 percent of the commission charged by full-service brokers like Merrill Lynch & Co., which don't provide around-the-clock access, Marks said.
''It's ironic that they would be required by the state of New York to provide much better service than their full-service competitors,'' he said.
E*Trade said a ''substantial number'' of its customers were unable to make trades between 10 a.m. and 12:45 p.m. New York time because of new software installed Tuesday night. The company said its changes were to add new services, not capacity.
On Wednesday, customers weren't able to make trades for more than 75 minutes during two separate outages. The company said the new software had affected other parts of its computer software and hardware that process more than 40,000 trades daily.
''In California, we would say we had an aftershock to an earthquake,'' said Lisa Nash, vice president for customer management. ''Volumes are ahead of normal; everything is stabilized, and we're watching it like hawks.''
Still Buying
Investors were undeterred by the trading interruptions and state investigation. They continued buying stocks of most existing and would-be online brokers, including shares of two firms with a history of regulatory problems.
M.H. Meyerson & Co. more than doubled to 16, up 8 9/16, in midday trading two days after the Jersey City, New Jersey-based brokerage, which has been fined in the past for supervisory violations, said it will launch an online trading service.
J.B. Oxford Holdings Inc. rose 8 3/4, or 73 percent, to 20 3/4. The stock has quadrupled in two days even though the company last week said it's under ''ongoing'' investigation by the Securities and Exchange Commission and a federal grand jury for possible market manipulation.
National Discount Brokers Group Inc., the No. 10 online brokerage, rose 4 1/8 to 41 3/4. It's signed a partnership to become the featured trading service on Crosswalk.com, a Christian Web community run by Didax Inc.
Siebert Financial Corp. rose 9 5/8, or 19 percent, to 59 1/8. The stock has tripled in three days. Charles Schwab Corp., the biggest online broker, fell 1/4 to 67 3/4, and Ameritrade fell 5 7/16 to 123 1/8.
E*Trade rose 1/4 to 55 1/2. It was as high as 61 before news of the outage.
14:54:07 02/04/1999
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