On-line Trading Caution
Washington State Department of Financial Institutions Securities Division cautions investors about on-line trading
Olympia (February 11, 1999) - As millions of investors open on-line brokerage accounts and Wall Street's computer systems strain to keep up with demand, Washington State Securities Administrator Deborah R. Bortner today offered some advice and urged caution.
An estimated 7.5 million investors have on-line brokerage accounts, a number that's expected to top 10 million by the Year 2000. Not surprisingly the on-line 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 on-line trading firms. Spitzer wants to know, among other things, details about their technological capacity, contingency plans, customer complaints and how orders are processed and executed.
"There's no question that the Internet and on-line investing have leveled the playing field between Wall Street and Main Street and driven transaction costs through the floor," said Ms. Bortner. "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 on-line investing and on-line trading."
Ms. Bortner offered these tips for investors venturing on-line:
- Before you pick an on-line brokerage firm, shop around. Magazines like Money and Kiplinger's Personal Finance rate on-line brokers using such criteria as speed of execution and customer satisfaction.
- Call Securities Division at 360-902-8760 or 1-877-RING DFI (1-877-746-4334) to see if the firm is properly registered and 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. Understand what you're getting and what you're not getting. Know your rights.
- Read postings on Internet news groups to see what other on-line investors are saying about specific firms as well as the industry. However, be aware that some postings may be posted by the company itself.
- Make sure you 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.
- Remember that technology can and does fail and that any system could be overwhelmed by demand in highly volatile market conditions. Your order could be delayed and you may not get the price you want. Consider using limit orders as opposed to market orders.
- If you have a problem with your on-line brokerage firm, try to resolve it first by contacting the firm's branch manager or compliance officer. If that fails, contact the Washington State Department of Financial Institutions Securities Division to file a complaint. (There is a complaint form on our web site. Also contact the regulatory arm of the National Association of Securities Dealers.
Ms. Bortner also urged investors not to be seduced by the allure of on-line trading. "Who wouldn't want to sit at home in front of their computer and make five grand before lunch? The reality is on-line 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 on-line trading, the 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, observed Ms. Bortner. "Warren Buffett didn't build his fortune by day trading."
For more information, call or write:
The Department of Financial Institutions
Securities Division
PO Box 41200
Olympia, WA 98504-1200
Phone: 360-902-8760
Or 1-877-RING DFI (1-877-746-4334)For further information contact: Deborah R. Bortner.
