The flood of trading at online broker E*Trade Group Inc. slowed to a trickle again Thursday, as technical glitches prevented customers from buying and selling shares for the second straight day. The outage was not just damaging for E*Trade though, as it focused renewed attention on the reliability of the Web as conduit for stock trading, and on the liability of online brokers when service is interrupted.
New York Attorney General Eliot Spitzer talks about an inquiry into E*Trade on CNBC Thursday.
DESPITE ASSURANCES Wednesday that the problems were fixed, online brokerage E*Trade reported an extended outage for a second consecutive day Thursday, as a software problem continued to plague the Internet brokerage.
Members who signed on hoping to place trades were met with a message that read, “Access to some areas of your account may be temporarily unavailable.”
The trading function was unavailable for 75 minutes Wednesday morning, and about 5 percent of E*Trade’s customers were unable to trade electronically throughout the afternoon.
On Thursday, the problem again affected the entire trading function for about an hour, beginning at around 10 a.m. ET. Service was restored to about 75 percent of customers within an hour, and about 350,000 accounts were affected, the company said.
The episode prompted an investigation of online brokers by New York State Attorney General Eliot Spitzer, who said on Thursday his office has received dozens of complaints about delays and glitches online traders.
“The public knows that there are always risks involved in investing in the stock market,” Spitzer said in a statement. “But part of the risk should not include questions about whether trades will be executed promptly or whether online brokerage firms can deliver on the services that they’ve promised.”
INVESTORS ENRAGED
Brokers at E*Trade’s Palo Alto, Calif. offices took telephone orders, but a swarm of jilted online traders jammed the lines, traders and analysts said. With the system still not fully operational Thursday morning, enraged investors immediately turned to Internet chat rooms to disparage E*Trade. Dubbing the brokerage EtrytoTrade or E*Trash, many threatened to move their accounts.
E*Trade said it will consider compensating customers for any losses they incurred on a case-by-case basis. The company said it had set up a special e-mail address at service2@etrade.com for customers with questions or complaints about recent outages.
Though one of the largest of the increasingly popular online brokerages, E*Trade is not the first online brokerage to falter.
“There are growing pains throughout the entire industry,” said Julio Gomez, founder of Gomez Advisors, a Cambridge, Mass., research firm that focuses on electronic commerce. “Since Thanksgiving, all the big firms have been pushing the outer limits of their capacity.”
Investors funneled a record 340,000 trades a day through the Internet in the fourth quarter, up 38 percent from the third quarter, and trading volumes in January are rising at the same clip, according to industry reports.
About one in seven stock trades now takes place online. Internet brokers have signed up some 7 million customers, and many expect that number to rise to more than 10 million at this year’s end. The surge in Internet trading, however, has led to many system outages at brokers, frustrating many investors.
‘There are growing pains throughout the entire industry. Since Thanksgiving, all the big firms have been pushing the outer limits of their capacity.’
– JULIO GOMES
E-commerce analyst E*Trade handled 2.8 million total transactions in its most recent fiscal quarter, up from 1.6 million in the same period of 1997. The company has wooed investors by offering a wide range of financial information on its site, including free real-time stock quotes for members.
The increased volume of online trading has been fueled in part by the rise of Internet stocks, which have soared in recent months. Day traders, who try to reap profits from short-term swings in stock prices, have also embraced the online brokerages.
The three top brokerage Charles Schwab, Fidelity, and E*Trade together control about 55 percent of the online trading market, according to Gomez. Over a dozen other players holding much smaller shares.
‘POTHOLES FOR CONSUMERS’
Spitzer’s office said it had sent letters to several online firms, asking them to provide information about their services. A spokesman was not immediately available to name the firms subject to the inquiry.
“Based on the tremendous growth of online trading, and a corresponding increase in complaint calls to my office, this is an issue we must look into,” said Spitzer. “Unfortunately, it seems that often the information super highway is full of potholes for consumers.”
‘Unfortunately, it seems that often the information super highway is full of potholes for consumers.’
– ELIOT SPITZER
New York State Attorney General One of those consumers is Ted Brown, a Jacksonville, Fla. journalist who took a day off Wednesday and found he couldn’t get into his online account to trade.
“If you make a deal with your customer and say that you’re going to provide a service,” he said, “you should provide that service even on the unusually heavy days. You should be able to provide that service.”
Brown, who said he’s lost thousands of dollars, has consulted an attorney and is contemplating legal action. And Brown is not alone.
WHO IS LIABLE?
‘The public is on notice … that a disruption is possible. And the public should be forewarned.’
– IRA SORKIN
Securities attorney Online brokerages typically disclose the potential for technical problems in the agreement customers sign to open an account. That disclosure, say some experts, limits the brokerage’s liability.
New York securities attorney Ira Sorkin, who has represented brokerage firms in litigation against aggrieved investors, says E*Trade also addresses the problem in its SEC filings.
“The public is on notice through their filing that a disruption is possible,” he said. “And the public should be forewarned.”
Still, online traders have come to expect instant access and 24 service – in part due to the marketing efforts of the online brokers themselves. But the issue of liability for service interruption is murky at best.
“If you use a full service broker and he’s on the phone or at lunch, and you can’t get through to him, what’s his liability?” said Joe Ricketts, Chairman and CEO of AmeriTrade.
While the online trading industry was clearly smarting from the episode, some analysts likened the outage to growing pains suffered by American Online, whose customers struggled with delays and outages as the company raced to keep up with demand.
“AOL was unmercifully castigated for its problems,” said Phil Leigh, an Internet analyst with Raymond James & Associates in St. Petersburg, Fla. “But it came out much stronger. So will the Internet brokerages.”
The glitches already have attracted the attention of regulators, prompting U.S. Securities and Exchange Commission chairman Arthur Levitt to warn cyberspace investors that they can end up paying more for a stock than they thought because of system delays and Internet shares’ wild price swings.