State regulators urge use of “limit orders” in volatile markets

WASHINGTON (March 26, 1999) – As millions of investors open online brokerage accounts and Wall Street’s computer systems strain to keep up with demand, state securities regulators today offered advice and urged caution.

By one estimate 7.5 million investors have online brokerage accounts, a number that’s expected to top 10 million by the Year 2000. Not surprisingly the online brokerage industry is experiencing growing pains. State and national securities regulators have been bombarded with complaints from investors stemming from much-publicized outages and computer glitches at major online brokerage firms.

On February 4, New York’s Attorney General, Elliot Spitzer, announced an inquiry into online trading firms to determine their technological capacity, contingency plans, customer complaints and how customer orders are processed and executed.

“There’s no question that the Internet and online investing have leveled the playing field between Wall Street and Main Street and driven transaction costs through the floor,” said Peter C. Hildreth, New Hampshire’s Director of Securities Regulation and President of the North American Securities Administrators Association (NASAA). “None the less, investors need to understand that technology isn’t infallible—especially in a startup industry. They also need to recognize that there’s a big difference between online investing and online trading.”

Hildreth offered the following tips when he testified this week before the Senate Permanent Subcommittee on Investigations, chaired by Susan Collins (R-Maine):

• Shop around before you pick an online brokerage firm. Leading financial publications rate online brokers using such criteria as speed of execution and customer satisfaction.
• Call your state securities regulator to see if the firm is properly registered. Ask for the firm’s CRD record to determine whether it has a regulatory disciplinary history. (CRD stands for Central Registration Depository, a computer database containing information on all registered brokers and brokerage firms in the U.S.)
• Look beyond the slick advertising. Carefully read the customer account agreement. Know your rights.
• Understand how the software works before you make your first trade; find out where to go if you make a mistake or have a problem.
• Don’t forget that technology can fail and that any system could be overwhelmed by demand.
• Remember that in volatile markets your order could be delayed and you may not get the price you want.
• Consider using limit orders when trying to buy volatile stocks like Internet-related initial public offerings (IPOs). Unlike market orders, limit orders allow you to set the price you’re willing to pay.
• Try to resolve a problem with your online broker first by contacting the firm’s branch manager or compliance officer. If that fails, contact your state securities regulator and the regulatory arm of the National Association of Securities Dealers (www.nasdr.com).

Hildreth also urged investors “not to be seduced by the allure of online trading. Who wouldn’t want to sit at home in front of their computer and make five grand before lunch? The reality is online trading—as opposed to online investing- is highly risky and only appropriate for people with the temperament of gamblers and who have money they can afford to lose.”

Despite all the media hype about online trading, he said, real wealth on Wall Street is still made the old fashioned way—by searching out quality growth companies and buying and holding for the long term. “Warren Buffett didn’t build his fortune by day trading.”