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Online eyes Capitol Hill
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March 18, 1999: 8:46 a.m. ET
As Congress scrutinizes hot industry, e-traders look for a lobby
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NEW YORK (CNNfn) - In politics, it's often not what you know, but who you know. Now online trading firms and their day-trading cousins feel they need to get to know somebody.
Faced with a sudden a surge in government interest in their activities, online stock trading companies are worried that they need to start making their voice heard in the lobbies of Congress. Especially since their more-traditional Wall Street competitors already are well known there.
"It looks like the old boys are trying to find a stone to throw at them [online traders]," notes Dan Burke, an analyst at Gomez Advisors, a Boston-based company that tracks Internet trading firms. "The leaders of the [online trading] industry are aware of the situation, and are taking steps to do something about it."
The most visible signal of a potential political contest came last month when four Democrats on the powerful House Commerce Committee called for an investigation by a federal watchdog agency into day trading.
That move, which some believe may be a prelude to more congressional review and legislative action, comes weeks after several states announced their own crackdowns.
Officials at the Securities and Exchange Commission and the National Association of Securities Dealers also are looking at Internet trading. That has come amid a raft of technical glitches that have clogged up online trading, causing losses for some investors.
Sources told CNNfn last week the SEC is stepping up its investigations of online trading.
Online inroads
Online stock trading has boomed in the last year, taking advantage of pricing benefits and easy investor access via the Internet. Wall Street brokerages can charge hundreds of dollars per trade, while online brokers and day trading firms typically charge far less, often $10 to $20.
According to Gomez Advisors, last year 35 percent of all retail trading was carried out online, up from just 15 percent in 1997.
Led by E*Trade Group (EGRP), Ameritrade (AMTD) and discount brokerage kingpin Charles Schwab's (SCH) eSchwab, online brokerages have amassed millions of accounts for more casual traders.
New technology also has opened doors for day trading, a related phenomenon in which investors, using information once exclusive to market makers, make quick trades to profit from slight stock-price swings.
Experts say that only about 5,000 people nationwide are full-time day traders, using a direct link to markets, but they're responsible for about 12-15 percent of the dollar volume of trades on the Nasdaq Exchange.
But as the industry has grown, so have consumer complaints. That has brought government probes at both the state and federal level.
New York Attorney General Eliot Spitzer is leading one such investigation. Alabama is said to be considering its own investigation.
Meanwhile, in Texas, Massachusetts, Pennsylvania and Florida, regulators have charged day trading firms with a host of violations, including false advertising, operating without licenses, and churning -- the tough-to-prove tactic of increasing trades to increase commission fees.
Until recently, Congress was outside the fray.
But on Feb. 11, House Commerce Democrats John Dingell of Michigan, Ron Klink of Pennsylvania, Edward Markey of Massachusetts, and Edolphus Towns of New York called on the General Accounting Office to launch a probe of day trading.
Dennis Fitzgibbons, deputy staff director for the Commerce Committee's Democrats, said there were two concerns behind their call, one of which is the ability to handle heavy traffic, more relevant to online traders.
"And then, there's the more troublesome aspect: the fleecing of people," he said. That scrutiny is likely to be targeted at day traders.
The SEC has been receiving about 300 complaints a day, largely having to do with an inability to execute trades, and there are just 3 staffers to process them, Fitzgibbons said.
So far, a political tug-o'-war hasn't yet started between full-service firms and their online trading counterparts, Fitzgibbons said.
But, he conceded, "there might be attempts for that down the road. We have no interest in getting into an competitive fight, but to make sure the companies are obeying the rules."
Connections
But access to the citadel of political power may prove to be invaluable as investigations of online trading progress, and proposals about how to prevent any troublesome practices are discussed.
"Historically, there has been a lot of ill will between the old guard/market makers and the day traders," observed Rick Roberts, an attorney at law firm Thelan, Reid & Priest in Washington and a regulatory expert who represents day trading firms and online brokers.
Should a political fight erupt, a trump card many Wall Street old-timers possess is longtime relationships with the nation's policy makers in Washington. The fledgling Internet trading industry has yet to develop such ties.
Many "wire houses" -- the full-service Wall Street brokers -- have affiliated political action committees to funnel money into PACs linked to members of Congress.
For example, according to Federal Election Commission filings, Dingell and Towns received thousands of dollars from top-tier Wall Street brokerages last year.
Of course, that's hardly unusual. Thousands of dollars from all sorts of interest groups pour into political action committees of members of congress each year. But it does suggest online brokers may be behind the curve.
It's not difficult to see parallels with other emerging industries that, after experiencing dramatic business success, found themselves confronted in Washington, sometimes with dramatic, regulatory results.
Railroads in the late 19th century and oil companies in the early 20th century are two major, historic examples. One more recent example is high-technology and software companies, admitted late-comers to the Washington lobbying scene.
The online trading industry does have some presence on Capitol Hill through existing interest groups such as the Securities Industry Association. Ameritrade is a member of that organization, but E*Trade is not. And the group includes traditional bricks-and-mortar brokerages.
For their part, day traders have an umbrella group, the Electronic Traders Association, but it still doesn't have high-profile access that premier Wall Street firms do.
And the ETA doesn't have a PAC and hasn't contributed to any campaigns so far, said Jim Lee, the organization's president and president of the day trading firm Momentum Securities in Houston.
There also are divisions in the online industry itself, which may interfere with the creation of a solid, lobbying front. Day traders and online trading firms don't see eye to eye about how to execute orders.
Some maintain big-name brokers aren't out to string up their tiny online brethren.
"They're not out to malign. They are concerned about the overall health of the market, ensuring that markets operate in the fairest, most efficient manner," said Jim Spellman, a spokesman for the trade group, the Securities Industry Association, referring to Wall Street firms in the organization's membership.
Indeed, as traditional Wall Street brokerage houses investigate ways to get into online trading, they might find themselves standing with online brokers instead of against them.
Merrill Lynch earlier this month began letting some of its well-heeled customers trade online, weeks after its purchase of the Internet trading technology of hedge fund D. E. Shaw.
And press reports recently indicated the investment bank Goldman Sachs, which does not even have retail brokerage services, could be on the hunt for expanded online ventures - perhaps with E*Trade.
-- by staff writer Jamey Keaten
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