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Non-Tech : A.B. WATLEY - THE ULTIMATE TRADER! -- Ignore unavailable to you. Want to Upgrade?

To: tom pope who wrote (783)	3/7/1999 10:52:00 AM
From: AlienTech	Read Replies (1) \| Respond to of 2045

The trade-offs of investing on line... By Penelope Patsuris y now most people have heard about the Internet trading meltdowns that have crippled so many investors in recent weeks. The biggest problem with online trading, however, isn't these well-publicized system outages, but the glitches and oversights--solutions to which are a long way off--that cost investors a lot of money every day. As the online brokerages scramble to upgrade their systems, trading sites will soon enough be able to accommodate the ever-growing number of traders who are logging on. The question of the moment though is, what happens to those traders after they enter a site? Often, they run into trouble. "I have one client who tried to cancel a market order hours before the stock started trading," says Jeffrey Feldman, a San Francisco securities lawyer. "She got a screen confirming the cancelation, but it hadn't been canceled. Then she learned she owned the shares, which plummeted, and lost $10,000 in 20 minutes." Another client of his was given a beta or test version of DLJ Direct's trading software, but wasn't informed that when DLJ upgraded the software her version was rendered useless. "She couldn't get through on the phone because DLJ happened to have a hot initial public offering (IPO) that day," he says. She lost $90,000. According to securities attorneys, online traders are routinely placing limit orders that are executed long after the share price has surpassed the requested limit. Other customers are receiving order confirmations only to learn that the trade didn't go through until much later, if not the next day, at a price very different from the time the order was confirmed. Often trades are put through on margin for thousands of dollars more than the margin "buying power" of a client's account, leaving portfolios wiped out and people in debt. -------------------------------------------------------------------------------- "That's a grand total of 40 brokers to handle ETrade's 600,000 accounts." -------------------------------------------------------------------------------- In order to protect themselves, investors must keep in mind what kind of recourse they do have should they find themselves in similar situations (See "Battling your e-broker"). First, it's important to understand that most of these problems occur because of software glitches and overloaded systems--nothing else can explain why orders that are confirmed never take place. Imagine an investor who puts in a limit order for a share at $80. Believing that the order has been executed, he tries to liquidate his position when the share reaches $85. Since there was no position, he has instead unwittingly sold short. Now imagine the stock hits $90. "These firms just don't have the capacity to take on the number of customers they're signing up," says Jeffrey Feldman. "And it's crazy because everywhere you look online brokerages are going full steam ahead to get them, offering free Internet access, no commissions and even incentives like depositing $75 in the accounts of customers who switch e-brokers." ETrade (EGRP) is currently named in two class-action suits by customers who have at times been unable to access the site. The first suit cites outages on Oct. 27 and 28, 1997, days when the market swung up 550 points and down 330 points respectively. The second suit is in reference to the more recent debacle, during the week of Feb. 1, 1999, when users were locked out for four hours over the course of three days. Both actions are going after the firm on grounds that it recklessly misrepresents its technical capacity with advertisements touting around-the-clock availability and trades that take less than a minute. In an apparent contradiction to these claims, ETrade's August 1997 prospectus actually states: "Heavy stress placed on the company's systems during peak trading times could cause the Company's systems to operate at unacceptably low speeds or fail altogether." There are blatant contradictions within ETrade's 15-page customer agreement; at one point it states that market orders are subject to immediate execution, only to later warn that the price at which an order executes may be different from the price the security is trading at when the order is entered.