O.T. - article about Internet stock brokerage glitches.
January 15, 1999
As Web Traffic Jumps,
Brokers Run Into Jam
By REBECCA BUCKMAN
Staff Reporter of THE WALL STREET JOURNAL
Point-and-click investing never seemed so complicated.
Billed as fast, easy and cheap, online stock trading -- increasingly an alternative
to conventional full-service investing -- became a nightmare for many of the
cybersavvy this week. Almost every major Internet trading house has
experienced Website slowdowns or downright outages during the past six
weeks, raising questions as to whether the flashy online-trading industry can
live up to its self-generated hype -- or even function efficiently when investors
need it the most.
Julio Gomez, an Internet-brokerage consultant
who runs his own firm outside Boston, calls the
latest online-service meltdown the worst since
October 1997, when even the mightiest
Web-trading firm, Charles Schwab Corp.,
sagged under the weight of heavy trading
volume. Then, Schwab and other firms made
pledges to upgrade their technology and add
more trading capacity so investors could do
business on even the busiest of days.
But Schwab's system went down briefly last
Friday, while officials at Waterhouse Investor Services and Discover
Brokerage Direct, a unit of Morgan Stanley Dean Witter & Co., purposely took
their Web sites off-line for short periods this week as they tried to dig out from
under the crush of orders. E*Trade Group Inc., the No. 2 online broker, is
struggling, too. Firms "just can't keep up with demand," Mr. Gomez says. "It's
been brutal all across the board."
Toronto-Dominion Bank's Waterhouse, one of the hardest-hit firms, is going
so far as to pull back planned advertising until its systems recover. Waterhouse
Chief Executive Frank J. Petrilli says: "Until these volumes blow off,
we are doing nothing more than adding people and improving our systems
every day."
To be sure, Internet stock trading hasn't come to a standstill. Mr. Petrilli points
out his company has handled an average of 120,000 trades a day this week,
about 65% of which were placed online. "How bad could we be if we're
executing four times what we executed last year at this time?" he asks. "Could
Merrill or Salomon Smith Barney handle four times their volume? I don't think
so."
Much of the volume across the industry, experts agree, is coming from a new
breed of active investors who trade stocks frenetically online -- often
highflying Intenet issues such as Amazon.com Inc. or Yahoo! Inc. That wild
trading can also create a dearth of liquidity -- the ability to trade easily -- in
certain stocks, meaning it is hard to find anyone to take the other side of a
trade.
Still, Mr. Petrilli acknowledges customers shouldn't be locked out of the Web
when they want to trade, or be forced to spend up to an hour on the phone
waiting for a customer-service representative. He says Waterhouse is working
with the company that handles its back-office systems, Automatic Data
Processing Inc. of Roseland, N.J., to clear up bottlenecks.
That is no solace to Dan Martin, a Waterhouse customer from Portland, Ore.,
who says he has been having problems trading on the firm's WebBroker
system for at least a month and a half.
Finally, this week, "I just said, 'I've had it,'" says Mr. Martin, who works as a
credit manager for a machinery company. "I sold everything. If I can't follow
the market, if I can't trade, and if I can't get a straight answer [about
customer-service problems], I quit.
It is unclear how many other investors will give up and suspend their Internet
trading, even temporarily. Hordes still are pounding their keyboards and
jamming up cyberspace with trade orders. At E*Trade, "I believe almost every
day this year has been a record trading day," says Kathy Levinson, the
company's president and chief operating officer.
But beyond the basic number of trades, other forces are wreaking havoc on
the fledgling industry. Bill Burnham, an analyst with Credit Suisse First Boston
Corp., points out many online-trading firms execute nearly 20% of their orders
in the first 30 minutes of the trading day, since so many individual investors
log in trades with their online broker after they get home from work in the
evening. All those trades are then queued up for the next day's market open,
putting a huge amount of stress on firms' systems.
It isn't just the front-end systems of the online-brokerage firms -- namely, their
Web sites and related computer servers -- that get hit. The Nasdaq
market-makers that actually execute most online trades also can run late
returning trade confirmations to online customers.
That means a customer might put in another order for the same stock,
mistakenly believing the first one wasn't executed. He or she could also call the
brokerage firm to ask about the trade, which clogs up already overloaded
phone lines, Ms. Levinson says. This week, both Schwab and E*Trade posted
warnings on their Web sites telling customers not to change or cancel market
orders. If they do, a poor execution "would be your responsibility," E*Trade's
note says.
On-line trading firms, though, are taking action. At Schwab, a visit last week
by Co-Chief Executive David Pottruck to the firm's Orlando, Fla.,
customer-service center should speed up efforts by the firm to respond to the
trading onslaught. Schwab already is converting its older computer system to a
more modern network, says Suzanne Lyons, Schwab's enterprise president of
retail-client service.
E*Trade, whose systems have recently been slow but haven't shut down, is
hiring 100 new phone representatives and beefing up the customer help on its
Web site so customers don't always have to call in.
The online-trading problems at most firms "are things that money and time will
solve," Mr. Gomez says. Agrees Richard Strauss, an analyst at Goldman,
Sachs & Co.: "Online trading is here to stay."
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