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New limits on Net trades
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February 2, 1999: 4:28 p.m. ET
Brokers add restrictions to protect investors from Internet losses
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NEW YORK (CNNfn) - Online brokers are taking new steps to limit trading in volatile Internet stocks in a bid to protect investors - and themselves.
The moves come as a steep increase in the amount of trading Americans do online has led to a surge in complaints to regulators.
In response, Charles Schwab Corp., the leading online broker, recently raised the amount of money investors must keep in their accounts if they trade 22 Internet stocks "on margin," or with borrowed money.
The firm increased the margin requirement to 70 percent for those stocks after boosting it to 50 percent just two months ago. It normally requires customers to keep 35 percent of the value of their margin loans in cash or securities in their accounts.
The move comes after the Securities and Exchange Commission said last week that investor complaints about online trading jumped more than fourfold in the year through last September.
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.
"We absolutely agree with what (Chairman Levitt) had to say," said Schwab spokesman Dan Hubbard. "He was warning investors against overextending themselves, and if you put it in a nutshell, that's why we made this move."
Investors who use the Internet to trade are often attracted to companies doing business online, such as Amazon.com. (AMZN). But many Internet companies including Amazon have yet to post profits, which can make the stocks extremely volatile.
Other factors contributing to volatility: the surge in demand and the relatively small number of shares outstanding. Many Internet companies only recently have gone public, meaning there is not a lot of stock available to the public.
Some of the stocks to which Schwab's new margin limits apply are Amazon.com, eBay Inc. (EBAY), E*Trade Group Inc (EGRP) -- a Schwab competitor -- Lycos Inc. (LCOS) and Yahoo! (YHOO).
Some brokerage firms, such as Waterhouse Securities, now require people buying Internet stocks to talk to brokers rather than investing online.
"We're trying to create an environment where investors stop and think about what they're doing," a spokeswoman said.
The rule applies to 10 stocks -- including Excite Inc. (XCIT), Broadcast.com Inc. (BCST) and some of the issues on Schwab's margin list -- and may be removed if volatility lessens, the spokeswoman said.
Other brokers are taking tougher steps. Discover Brokerage Direct, owned by Morgan Stanley Dean Witter, will not let customers buy 20 Internet stocks on margin, USA Today reported. Officials at the firm were not immediately available to comment.
Meanwhile, the fascination with Internet investing shows no signs of abating.
Heavy trading in Internet issues pushed up online trading volume an estimated 25 to 50 percent in January after a 34 percent rise to 340,000 trades a day in the fourth quarter, CS First Boston said Tuesday.
Joe Ricketts, chairman of Ameritrade Holding Corp., said the surge in Internet investing has taken the industry by storm, adding that the online broker is expanding as fast as it can.
"We're doing business today that we expected next August," he told CNNfn. "This rapid movement to the Internet has caught us and everybody else off guard."
-- by staff writer Steven Radwell 
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