Archive for Sunday, October 7, 2001

Let online investor beware, regulators say

October 7, 2001


The bleak stock market environment of recent months finally may have proven what state and federal securities regulators suspected all through the bull market of the 1990s online investors are not as savvy as they think they are.

That's particularly true of those who were scorched by investing too aggressively in the technology sector. Regulators are hoping that cybertraders, now properly humbled, will listen to the experts and become better educated and more prudent.

"We have noticed that investors didn't understand all they needed to understand about trading online," said John Nester, spokesman for the Securities and Exchange Commission. "And many of them suffered huge financial losses as a result."

So state and federal regulators say they are using the current lull in online trading activity to identify the most troublesome areas of online trading and then warn receptive investors.

And apparently, there are plenty of trouble spots. The number of complaints about online brokers has increased drastically in recent years from 467 in 1997 to 4,271 last year, according to the latest figures available from the SEC.

With trading down as much as 50 percent at many online firms such as Charles Schwab Corp. and TD Waterhouse Inc. the number of complaints likely has dropped this year, but regulators are moving forward with an aggressive education effort nonetheless.

The North American Securities Administrators Assn. (NASAA), the national organization of the 50 state securities regulators, announced recently what it called a "major Web-based education effort."

Those who log on to the NASAA-sponsored Investing Online Resource Center are treated to an investing simulator center that helps highlight some of the pitfalls of online trading.

"Through Web simulation, investors can see in graphic terms the implication of a particular trade," said Deborah Bortner, president of NASAA. "They are permitted to choose what they would do in a given circumstance and then see the ramifications."

Unlimited confusion

For example, one of the most frequently experienced problems identified by the state regulators involves confusion about limit and market orders.

Novice investors often will see a stock they like priced at, say, $10 a share. They then place a market order with their online broker under the perfectly rational but totally misguided notion that they will get the stock at that price.

Often, by the time their market order is executed on the floor of one of the exchanges the price has moved higher, and they must pay that price. With a limit order, however, investors can set the price at which they will buy or sell if they place a $10 limit buy order, the trade will be executed only at that price. If that price isn't met, the order is not executed.

"I think a lot of online investors think they have instantaneous connections to the exchanges, but they don't," said Nester of the SEC. "They will see a stock they want at $14, but if they don't place a limit order, it may go to $100."

Trouble, 24/7

State and federal regulators also said they are seeing a lot of confusion involving after-hours trading, meaning after the normal 3 p.m. (Central time) closing of the major exchanges.

The problem is that some of the standard securities rules don't apply in the after-hours market.

For example, someone could offer to sell 1,000 shares of stock at a certain price in the after-hours market, but when a buyer attempts to purchase those shares, the seller can refuse to sell.

During normal hours, those shares have to be sold if they are offered.

"Sellers sometimes do this just to see how much interest there is in the stock," said Cynthia Perthius, an online trading expert at ProTrader Securities Corp. in Dallas.

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