State securities regulators warn of hidden costs, delayed executions, dangers of trading too much
WASHINGTON (November 26, 1999) – With online brokerage firms poised to spend a reported $1 billion on advertising in the coming year, state securities regulators today warned investors to look beyond the hype and beware of hidden costs, delayed executions and the risk of trading too much.
“It’s a cutthroat marketplace and online firms are desperately trying to distinguish themselves with funny and clever ads,” said Bradley Skolnik, Indiana Securities Commissioner and president of the North American Securities Administrators Association (NASAA). “There’s no question that online brokerage has reduced commissions and democratized Wall Street, but there’s been a lot of hype, too. Investors need to be aware of what those ads don’t mention.”
Skolnik pointed to:
Hidden costs. Behind-the-scenes but legal payments between online brokerages and market makers – so called “payment for order flow”—may reduce the incentive to get the investor the best price when buying or selling a stock. Such payments could cost investors much more than they save on commissions.
Trading delays. Most online brokerage ads suggest that investors have instant access to the market. They don’t. Delays in order execution can result in worse prices. Skolnik urged investors to use limit orders, not market orders, so they can set the price they want when they buy or sell a security.
Trading too much. “Online brokerage is new and cutting edge and we’re enjoying the best stock market in generations. The message of most of these ads is ‘just do it’ and you’ll do well,” Skolnik said. “The fact is research and common sense suggest the more you trade the less well you’ll do.” Real wealth on Wall Street isn’t made by day traders but by patient investors who buy quality companies and hold for the long term, said Skolnik, nothing that investors can follow this time-tested strategy by using an online or traditional brokerage firm.
Finally, Skolnik, said, online brokerages aren’t for everyone. “You need to take stock of yourself. If you have the time, the temperament and the interest to actively manage your own money, an online brokerage account may be for you. Otherwise, mutual funds or an old-fashioned human broker is probably the way to go.”
Skolnik urged existing and prospective online investors to read two new reports, issued this week, on online brokerage services. A report the by New York Attorney General Eliot Spitzer described technology problems and bottlenecks that have plagued the industry and urged more disclosure so investors can make better decisions. A report by Commissioner Laura Unger of the U.S. Securities and Exchange Commission suggested that under certain circumstances online firms might have “suitability” obligations to assure that investments are appropriate for a customer based on their age, financial circumstances, goals and tolerance for risk.