Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Technology Stocks : Compaq -- Ignore unavailable to you. Want to Upgrade?

To: Pruguy who wrote (38113)	12/1/1998 10:44:00 PM
From: Kenya AA	Respond to of 97611

Pruguy: CNBC reported that DLJ and Salamon were enforcing new rules but I don't know what the new rules are. This article pretty much tells the story: Perhaps the biggest indication of how unwieldy Internet stocks have become is that brokers have raised margin maintenance requirements. Online Trading: Even Online Investors Find Snags in Net-Stock Trading By Amy Olmstead Staff Reporter 12/1/98 5:36 PM ET Online brokers are having trouble keeping up with their Internet brethren. Internet stocks generally managed to break even today after plunging into a sinkhole Monday. But the break in the latest screaming rise in Net-related stocks provides more evidence of just how difficult it is to get a handle on the sector. Trading enthusiasm for the sector is heady, especially at online brokers, where tech-savvy and tech-focused traders tend to congregate. And while that makes it hard to rationally value the stocks, it also means some online brokers are struggling to deal with the activity. For example, Charles Schwab (SCH:NYSE) says it won't trade online two upcoming Internet IPOs -- uBid and Ticketmaster Online. Yesterday, Schwab, the largest online broker, stopped online trading on seven other Net stocks, forcing customers to use a live broker. And according to some customers, Schwab's site was slower than usual. A spokesman says that because of the stocks' volatility, traders may enter a trade, see the stock jump or fall and then try to cancel or enter another trade. Especially on heavy-volume days, keeping up with rapid-fire order changes can leave some customers with orders they didn't want. Funneling traders through a broker can help traders make sure the order they want is executed. In addition, National Discount Brokers, a unit of National Discount Brokers Group (NDB:NYSE), had intermittent trading problems on Monday, its second-heaviest-volume day ever. The Internet-heavy volume, as well as recent technology upgrades, was to blame, says NDB Chairman Dennis Marino. But perhaps the biggest indication of how unwieldy Internet stocks have become is that several brokers have raised margin-maintenance requirements on some of them. Margin requirements, the amount that a client must deposit in cash or eligible securities to buy securities on margin, are related to how much risk a broker wants to take on in lending. In figuring out the acceptable risk, brokers typically examine several factors in margin lending, including the client's history, the securities in the account and the securities the customer wants to buy on margin. A more volatile security implies a greater risk of loss. At least four brokers -- Ameritrade (AMTD:Nasdaq), the Waterhouse unit of Toronto Dominion Bank (TD:NYSE), Donaldson Lufkin & Jenrette (DLJ:NYSE) unit DLJdirect and National Discount Brokers -- say that margin maintenance requirements have been raised on some Internet stocks, sometimes to as much as 50%. (The minimum maintenance requirement in the industry is 25%.) Increasing margin limits on volatile -- and therefore risky -- stocks is a prudent business decision on the part of the brokers, says Bill Burnham, an analyst who follows the online brokers at Credit Suisse First Boston. But by curtailing lending, the changes could reduce buying in the stocks and even prompt some selling as customers try to meet the new requirements. And yesterday's news that several brokers had raised margin requirements, reported in The Wall Street Journal, may have acted as a reminder of the sector's riskiness, dampening investor sentiment. Many Internet stocks have low institutional ownership. For example, 3.2% of eBay (EBAY:Nasdaq) and 3% of K-tel International (KTEL:Nasdaq) is held is by institutional investors, according to Technimetrics. (Both had their margin maintenance requirements raised by Waterhouse.) Even after large insider stock holdings are taken into account, institutional ownership is outweighed by retail ownership in some Net stocks, leaving room for retail investors to influence prices. How easy it is for the retail customer to trade, including how risky the traders perceive a stock to be, could have an impact on how far up these stocks can run. However, several factors suggest the impact might not be that significant. The four brokers say that margin limits on all stocks are reviewed on a regular basis with an eye to volatility and market conditions. They say Internet stocks aren't the only ones targeted for their volatility and DLJdirect says its changes had not necessarily been made recently. Several other brokers that were contacted, including Schwab and E*Trade (EGRP:Nasdaq), the two largest online brokers, say they deal with margin requirements on a case-by-case basis by evaluating a variety of factors such as the client's history and other securities in their account. And any changes that have been made have likely been in place while Net stocks soared through the end of last week. The impact on liquidity of the margin requirements may be small. "For a couple of hyperactive traders, it might slow them down a bit," says Burnham at Credit Suisse First Boston. But "I don't think you'll find it will have much of an impact."