Problems with Internet Trading

If you have not made a trade on the Internet yet, you probably have at least been accosted by one of your office mates who is bragging about all the money he has made trading on the Internet. Online brokers - E*Trade, Ameritrade, Datek Online, SURETRADE - just to mention a few, are here to stay. It seems that only a few years ago people were hiding in their office cubicle playing games on their office computer. We have now risen to a whole new level. Donkey Kong no longer satisfies us. These days we want to play computer games that allow us to make more money than our employer pays us:

For those of you who are regular readers of my column, you know that I make a living handling securities arbitration cases. Well, you guessed it - a decent percentage of my securities cases now involve Internet trading. Here are a few things you should consider:

Order Failure

The number one complaint that I am seeing is what we call classic order failure. That is where you have entered an order to buy or to sell a stock and you do not get the fill/execution that you think you deserve. I currently represent a client who placed two market order trades through E*Trade on the same day. Dissatisfied that his market orders had not filled within 20 minutes of the trades, he promptly canceled the two orders. E*Trade sent my client confirmations of the cancellations. The following day, E*Trade informed my client that the cancellations were Reported in Error and that the stocks had been purchased that day (the day after the orders). In the interim, the stocks had dropped precipitously, causing my client to sustain a loss. Just because you may be calling the shots and making all trade decisions yourself in an online brokerage account, you can still hold the firm responsible for giving you a prompt and proper execution of your transactions.

In another case, a man put in a buy order for 2,000 shares of an internet IPO at market for an approximate $25,000 purchase price. Hours later, when the order was executed, the stock had skyrocketed and it cost $165,000 to fill the order. Yet, the man only had $34,000 in his account. In the past, when he had placed orders and his account had insufficient funds, the brokerage firm refused to execute, and he assumed that it would happen again. Not so. The brokerage firm advised that if he did not pay in 3 days, it would liquidate his account. IPO stock promptly dropped like a rock and he couldn't pay. The brokerage firm sold his IPO stock for half the purchase price, liquidated his other holdings and now demands that he pay about $60,000, which he does not have.

The individuals in each of the above scenarios have the right to sue for order failure. One of the most basic duties of a brokerage firm is to execute market orders, if not instantaneously, then within minutes - not hours later and not days later.

Information on the Internet

Many of you are tapping into chat rooms and finding that when you pull up a particular stock, you can simply click on comments about that stock. A warning is in order: take those comments with a grain of salt. First, anyone who can type can enter a comment, and you unwittingly may be reading the words of a 14 year old idiot. There is no screening for such postings. Second, the comments you read may have been posted by individuals with serious conflicts of interest - they may be underwriters of the stock, people with large positions, brokers who have built their book on it, folks who have every reason in the world to pump up or degrade the stock. The last thing that they care about is your personal well being.

Margin

If Internet trading alone is not fast and furious enough, many people are trading on margin. That is where the brokerage firm lends you money by leveraging your account, allowing you to buy a large amount of securities by putting up only a small amount of money. You may have forgotten what you read in the small print of your Agreement, but the brokerage firm has the right to change the maintenance margin requirements without any warning or notice to you. In fact, the firm has the right to liquidate your securities holdings (and it can pick and choose which ones) without any notice to you if you fail to meet the margin call. And there you were leveraged to the hilt, hoping to hit a home run when you discovered that you are required to make a large deposit that you cannot make. The next thing you know, the firm is selling off your securities at a point in time that is not the best for you. These are the perils of trading on margin.

The speculative craze that is currently engulfing the public is unparalleled. Investors are hooked on the ability to trade on the Internet from home in their jammies at any hour of the day or night for commission costs which are negligible. Their fever is the same fever has driven the prices of many Internet oriented stocks to frightening levels.

If you are hooked, be careful. But be extra cautious if you are trading in these numerous speculative stocks. I hope you have accounted for your kids college education.

Contact Ms. Stoneman - Stoneman Law Offices - Texas & Colorado. (719) 783-0303 Free Consultation - Representing Clients Nationwide


Tracy Pride Stoneman is an attorney specializing in investment related complaints. . Preparation of this article was assisted by Douglas J. Schulz, a registered investment advisor and former stockbroker in Colorado Springs.