UPDATE - GAO Calls for Warnings from Glitch-Prone Online Traders

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GAO Calls for Warnings from Glitch-Prone Online Traders By Sandra Sugawara Washington Post Staff Writer Friday, June 9, 2000; Page E02

Each of the top 10 online stock brokerages--which collectively account for 90 percent of the online trading volume in the United States--has suffered from delays, outages and other technology glitches that have caused investors to lose money, according to a report by the General Accounting Office.

The GAO recommended that the Securities and Exchange Commission require online brokers to keep better records of delays and outages and to inform their customers of the risk of service disruption. It also recommended that the SEC monitor the adequacy of the brokerages' computer capacity.

The study also found that online brokerages sometimes failed to follow rules requiring them to furnish investors with information relating to margin loans, privacy information, trading risks and the right of investors to specify which dealers execute their trades. Online brokers often route trades to favored dealers without checking first to see if another firm may be offering a better price.

Investors are most likely to complain, however, when they can't access their accounts, the problem that the SEC hears about most frequently, said the study.

Data collected over 17 weeks by the GAO showed that there was a greater chance that orders would either not be executed or would be executed at an unexpected price if it took investors a long time to enter a stock trade. One investor lost up to $6,000 in an unsuccessful two-day effort to submit a sell order through a major online firm's Web site.

Officials at two firms told the GAO they have reimbursed customers more than $1 million for losses due to outages. But many other firms refuse to compensate customers' losses resulting from technical failures, said the study.

The online brokerage world is, in many ways, the victim of its own success. From the end of 1997 to mid-1999, the number of online brokerages more than doubled, to about 160 firms, and the number of online accounts nearly tripled, to 10.5 million. Eleven firms told the GAO they plan to spend $1 billion on advertising to bring in even more customers this year.

Their lower fees--an average of $15.75 a trade--have enabled them to steal customers from full-service brokerages, which charge $90 or more, and also to attract new investors.

"But the flood of online trading has created new traps for unwary investors, and warning signs that are vague, hidden or not posted at all. These problems threaten to undermine the gains normally associated with trading online," Rep. John D. Dingell of Michigan and four other Democrats told SEC Chairman Arthur Levitt Jr. in a letter endorsing the study's recommendations.

The GAO studied the 10 largest online trading firms, along with two smaller ones. An official from one small brokerage told the GAO that the company had so many outages it stopped keeping track. The other 11 firms reported a total of 88 outages during the first nine months of 1999.

Nearly all the firms said their computer problems were not related to capacity. Rather, glitches occurred when the firms installed new hardware and software. Brokerage officials said that delays and outages will continue because they must continue to upgrade their computer systems.

The SEC also cautioned that the daily trading volume figures supplied by the firms does not mean that they can handle big surges, according to the GAO.

Eight of the 12 firms have notified customers of the potential for technical problems, and one firm recommended that its customers open an account with a competitor to avoid trading problems during any disruption.

) 2000 The Washington Post Company


-- (Dee360Degree@aol.com), June 09, 2000

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