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Brokers tighten 'Net leash
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December 2, 1998: 7:37 p.m. ET
Wall Street firms curb margin investing for mood-swinging cyberstocks
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NEW YORK (CNNfn) - If you're going to use borrowed money to trade those high-flying Internet stocks, be prepared to pay up.
In an effort to bring some stability back to Internet stock investing, a number of brokerage firms are making it harder for individuals to use borrowed money to invest in schzoid Internet stocks.
A spokeswoman for Salomon Smith Barney said Wednesday the Wall Street firm had imposed new restrictions on shares of 18 companies, including such digital darlings as Yahoo!, America Online and eBay. She declined further comment about the move.
In addition, The New York Times reported that DLJ Direct, the Internet arm of Donaldson, Lufkin and Jenrette, also put the brakes on margin investing.
Margin players can borrow up to 50 percent of the value of stocks and 90 percent of the value of bonds from their brokers. But if the portfolio loses value, the brokerage asks for more money to cover the loan and issues a "margin call."
Industry experts attribute the moves to the incredible volatility in Internet stocks, and widespread concern that individuals are gambling on Internet stocks with money that don't really have.
"In the last three months, there have been some huge price moves on some of these stocks," said Keith Wirtz, chief investment officer for equities at TradeStreet Investment Associates. "There's been an explosive performance."
Indeed, it is the explosive nature of Internet stock prices now that prompted brokerage firms to raise the collateral that investors are asked to put down when buying stocks on margin.
Wirtz said most of the Internet stock buying has been coming out of the retail channel, with little in the way of block trades going on.
He cited a recent case involving AvTel Communications, where initial reports indicating the Santa Barbara, Calif.-based company had introduced a new modem set its stock taking off like a rocket.
AvTel's stock rose more than 1,000 percent, but the ride ended abruptly when the modem report turned out to be incorrect.
Keith Benjamin, Internet analyst at BancAmerica Robertson Stephens, said that given this kind of activity, the brokerage firms are "basically protecting people from themselves."
"The Internet has been a rapid roller coaster," Benjamin said. "I'm not surprised." 
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