(See Bold)11/22/99 Reuters Eng. News Serv. 14:53:00
Reuters English News Service
C) Reuters Limited 1999.
Monday, November 22, 1999
USA: NY Atty. Gen. criticizes Web trading.
(Fixtes typos)
NEW YORK, Nov 22 (Reuters) - Online investors expect 24-hour service and
direct access to the stock market, but they often are at the mercy of
brokerage Web site failures and slow order processing, New York's attorney
general said on Monday.
State Atty. Gen. Eliot Spitzer, in a 199-page report on the online brokerage
industry, made several recommendations, but avoided mentioning fines or
penalties.
Spitzer in February began an inquiry into Web brokerages after industry
pioneer E*Trade Group Inc's Web site had technical problems for three
consecutive days.
Spitzer announced a $500,000 education campaign to be paid by the brokerage
industry's trade group, the Securities Industry Association. The campaign,
which will include full-page newspaper advertisements, aims to educate
consumers on the benefits and pitfalls of online trading.
Spitzer's report, which will be available on the Attorney General's Web site
oag.state.ny.us, comes at a time online trading is still growing
rapidly. Investors funnel more than 500,000 stock trades through the Internet
each day, or one in six trades. The number of online trades is expected to
rise to one in four next year, Spitzer said.
But there is a persistent "expectation gap" between what investors expect and
what Web brokers deliver, Spitzer said. That gap is fuelled by a $1
billion-plus advertising campaign by Web brokers to draw more customers, he
added.
"If you were to believe all the online advertising today, you would get the
impression that investors have access to both instant trades and instant
wealth, neither of which is true," Spitzer said. Web brokers, whose ads
clutter sports broadcasts and adorn buildings, should be more forthright about
their services, he added.
Internet brokers should warn investors their stock orders are not processed
instantly and should tell them when their Web sites are down, Spitzer said.
Consumers, for their part, should realise Internet stock trading can be
frustrating because of technical glitches and does not lead to instant riches,
Spitzer said. And regulators should require Web brokers to document system
failures, performance standards and customer services data, he said.
Most Web brokers are investing in technology and people to prevent the string
of Web site failures that locked customers out of their stock trading accounts
in the first quarter, Spitzer said.
The Attorney General's office is receiving fewer complaints than earlier this
year, Spitzer said. But Web brokers should fix some remaining problems,
including better and faster disclosure of system failures, Spitzer said.
Several of the seven Web brokers Spitzer's staff probed failed to tell
customers about measures they took to slow down traffic to their site, Spitzer
said. These included blocking orders for certain stocks or preventing
customers from cancelling or modifying their orders when the brokerage's Web
site became overwhelmed, Spitzer said.
Web brokerage also should aim to dispel certain investor myths, instead of
fostering them, Spitzer said. The biggest is that consumers often assume their
stock order is processed, or executed, the moment they click on the "buy"
button, Spitzer said.
In fact, online brokers don't process customer orders themselves. They
transmit them to a market maker or alternative trading system for processing,
wait for confirmation and then alert the customer. In hectic market
conditions, such an alert can take hours, Spitzer's report said.
Spitzer's staff - 10 to 15 people - spend many hours on the inquiry, probing
seven - unnamed - Web brokerages and three share dealers, including
Knight/Trimark Group Inc , which receives a large portion of all online stock
trades. Staffers reviewed more than 120,000 pages of documents and visited
firms at 12 sites in five U.S. states.
((-Jack Reerink/ Financial Services Desk (212) 859-1725-)).
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