N.Y. Examines Online Broker Delays as E*Trade Crashes (Update5)
2/4/99 18:15
N.Y. Examines Online Broker Delays as E*Trade Crashes (Update5)
(Adds Spitzer comments in 3rd, 7th, and 8th paragraphs.)
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.
''We want to make sure that as online trading grows
exponentially, the service doesn't suffer,'' said Attorney
General Eliot Spitzer. ''I'm expecting we'll get cooperation''
from brokerages, he said, adding he'll coordinate his efforts
with federal regulators and fellow attorneys general. ''I think
there will be a global resolution,'' resulting in new protections
for investors, he said.
Online brokerages have been unable to keep up with mouse-
clicking investors, who 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.
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 sent letters to more than
10 online brokerages this week asking that they provide
documents, reports and ''other information regarding their
services,'' said Spitzer. He declined to specify which would be
getting letters.
''We want to focus on who bears the risk, and make sure that
firms provide adequate notice of risk,'' said Spitzer.
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.'' Many of those who
complained may have been directed to Spitzer's office by a
posting on a Yahoo! Inc. online bulletin board, said his
spokesman, Scott Brown.
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. rose by two-thirds, or 4 15/16, to 12
3/8, 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. Its volume of 13.1
million shares was more than double its volume for all of 1998.
J.B. Oxford Holdings Inc., the most actively traded U.S.
stock on volume of 33.4 million shares, rose 3 7/8, or 32
percent, to 15 7/8. The stock has almost 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, fell 7 5/8, or 20 percent, to 30 after earlier trading
as high as 47. 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. fell 6 1/4 to 43 1/4 after trading
as high as 70 5/8. Charles Schwab Corp., the biggest online
broker, fell 1 11/16 to 66 5/16, and Ameritrade fell 17 13/16, or
13 percent, to 110 3/4.
E*Trade fell 1 3/4 to 53 1/2. It was as high as 60 7/8
before news of today's outage.
E*Trade hasn't had a major outage in 18 months, said Marks
of Deutsche Bank Securities. The company has been ''bragging''
that its ''stateless architecture'' is superior to competitors'
trading systems. ''That's what makes this so embarrassing.''
--Randy Whitestone (212) 940-1805 in the New York newsroom with
reporting by David Callaway in San Francisco /jh/daa
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