Responding to evidence that online brokers do not provide their customers with the best information about risks, margin accounts, privacy and other key issues, the U.S. General Accounting Office (GAO) is recommending that government regulators require Internet trading firms to post more disclosures on their Web sites.
The report from the GAO, the nonpartisan investigative arm of the U.S. Congress, also indicates that computer glitches and outages at online brokers have caused some investors to lose money.
“Some customers have complained to the SEC that they lost money or missed financial opportunities because they did not understand how online trading worked,” the report said.
For example, the report said that an investor used a margin account at his online brokerage to place a trade on a stock for which the firm had decided not to allow margin trading, but that limitation was not disclosed on the Web site. As a result, the customer had to pay the total price for the security, and ended up owing the brokerage an additional $75,000 (US$).
Only four of the 12 sites studied posted on their Web sites information about special margin requirements for volatile stocks, the GAO found.
The GAO looked into the issue at the request of a group of congressional Democrats, and based its report on an examination of the ten biggest firms and two smaller ones.
Growth Accompanied by Delays
By all accounts, online trading is booming. The number of broker-dealers offering the service more than doubled between the end of 1997 and the middle of 1999, with about 160 firms currently in the market, according to the GAO report.
The growth in online trading “has been accompanied by a series of delays and outages in broker-dealers’ automated trading systems that have caused some investors to suffer losses or miss investment opportunities,” the GAO report said.
All 12 online brokerages studied by the agency had experienced some delays or outages due to computer upgrades, software failures and so on. Officials from the companies told GAO investigators they expect such glitches to continue because of the ongoing need to make improvements to their systems.
The GAO recommended that the Securities and Exchange Commission (SEC) — which has oversight of the industry — require broker-dealers with online trading systems to keep records on delays and outages and their related causes and disclose the potential for disruptions on their Web sites.
The agency also recommended the SEC ensure that the firms post on their sites “accurate and complete information” about risk disclosure, margin requirements, privacy considerations and trade executions.
Charles Schwab (NYSE: SCH) is the largest online brokerage, followed by E*Trade Group (Nasdaq: EGRP).