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Online trading luster dims
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January 29, 1999: 3:41 p.m. ET
Regulators advise caution as complaints rise, but growth still seen
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NEW YORK (CNNfn) - Americans' love affair with investing over the Internet may be cooling, but the prospects for a healthy long-term relationship still look good.
Despite a recent jump in complaints to regulators, investing online is just too attractive, industry experts say: it's cheap, it's easy when it works properly, and the wealth of news, market and account data available on the Internet is unsurpassed.
So millions of new users will keep signing up, brokers and analysts predict, leading to big changes on Main Street and Wall Street.
"What we are looking at is the creation of a new economic order," said Elizabeth Rowe, a financial services expert at Find/SVP consultants. "People will worry about the widows and orphans … (but) it's a masterpiece of a real market economy at work."
Still, the system is young - Rowe described it as out of infancy and now wearing "big boy diapers" - and a host of glitches have led to a jump in complaints, the Securities and Exchange Commission said this week.
About 1,100 people complained to the regulatory agency in the 12 months through Sept. 30, more than four times the 259 complaints about online investing the year before.
The rise prompted SEC Chairman Arthur Levitt to issue a statement telling people to do their homework about investing and the companies they buy online, something market pros say a startling number of small investors still do not do.
"Online investors should remember that it is just as easy, if not more, to lose money through the click of a button as it is to make it," Levitt said.
People in the industry welcomed the statement, though it provided little comfort to those who lost money or did not lock in profits because of problems executing trades online.
"I've lost several thousand dollars on single trades because of a server being down," said Walter Fricke, a 33-year-old from northern New Jersey who trades online during the day and teaches at his martial arts school at night.
"When they're good, they're good, but when there are delays, you hate them," he said, referring to online brokers.
Fricke is one of the so-called day traders - nonprofessionals known for chasing quick profits online, often in Internet issues - who some professionals say have contributed to the logjams that can clog online trading systems.
The problems have forced many online brokers to restrict or even stop trading in volatile Internet issues - Amazon.com (AMZN), Yahoo (YHOO), Excite (XCIT), eBay (EBAY), and Lycos (LCOS) among them. Refund or customer complaint policies vary widely from broker to broker.
Online investing "will continue to grow," said Bernard Madoff, head of a professional trading firm who's been in the business 40 years. As for online day trading, he said: "That's a bull market phenomenon that's being overdone and will clearly slow down dramatically if and when the market falls."
Experts said it was unlikely regulators would limit online day trading or impose major new rules on Internet investing.
"That's not in the cards," said Julio Gomez, co-founder of Gomez Advisors Inc., a research firm specializing in consumer e-commerce issues. "In the end, consumers will be free to trade any way they want."
Smaller steps are being taken. The SEC put a new rule into effect Tuesday saying market makers - professional trading firms that match buyers with sellers -- had to post prices of IPOs 15 minutes before trading in the new issue began, up from five.
Such rules are meant to lessen volatility, which could help accelerate the growth of investing online. Consultants say 10 million brokerage accounts will be able to trade on the Internet by year-end, nearly double the number now.
Still, investing online may or may not be for you.
"My dad called me this weekend and asked if he should open an online (brokerage) account," said James Punishill, analyst at Forrester Research Inc., the consulting firm that specializes in technology issues. "I said, 'Dad, you've never made an investment in your life'," he said.
On the other hand, Barbara Roper, head of investor protection at the Consumer Federation of America, a Washington-based consumer group, said her elderly mother -- a savvy investor with a substantial nest egg -- would be a natural for investing over the Internet.
-- by staff writer Steven Radwell
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