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Brijesh Malkan
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Solving the Last Mile Problem in Investment Research

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March 1, 2001

New Capacity Rule for Online Brokers?

By William Hoffman

A new Securities and Exchange Commission report offers online broker dealers a checklist designed to educate investors about conventional trading practices.

There is nothing controversial and no apparent smoking guns. In fact, the report is practically boring.

"Examinations of Broker Dealers Offering Online Trading: Summary of Findings and Recommendations" reviews the SEC findings "in light of the phenomenal increase in online trading in recent years," according to a statement released by the commission.

"Most of this [report] has to do with problems that arose as volumes were increasing at a very rapid rate," according to Jim Marks, an analyst who covers the online broker dealers for Credit Suisse First Boston. "As that growth of volume has abated, so have the symptoms of those problems."

Nonetheless, given the history of systems outages among some online broker dealers, the report has fueled rumors that the SEC could revive a controversial rule to sanction firms whose technology crashes much too frequently for the regulator's comfort.

Implement Rule

No regulation is officially expected as a result of the report, issued after the two-year examination of online broker dealers. But there are reports that the SEC might try to implement a rule it proposed in 1999 that would sanction firms with a history of systems breakdowns.

Nonetheless, SEC spokesman John Heine said the report is intended only as a review, and that no proposed regulations are contemplated.

The report also lists SEC staff observations of online broker dealer practices, ranging from disclosure to customers about order execution, best execution, trading on margin to systems delays as well as operational capacity, security and privacy measures. Other topics covered include advertising practices and supervision of employees' Internet use.

Rich Repetto, senior vice president at Putnam Lovell Securities in New York, described the report's concerns about capacity, informing users how to use an [online broker dealer's Website], better disclosure, procedures, processes and warnings on advertising as "common sense." The SEC wants brokers "to make a better effort to communicate the risks of trading to the online investor," he said. But the report contained no surprises, he added.