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GAO Reports That Computer Bugs Have Cost Investors Online Profits

By Sandra Sugawara

All of the top 10 online stock brokerage firms which collectively account for 90 percent of U.S. online trading volume have suffered delays, outages and other technology glitches that have caused investors to lose money, according to a report by the General Accounting Office.

The GAO recommended that the Securities and Exchange Commission require online brokers to keep better records of delays and outages and to inform their customers of the risk of service disruption. It also recommended the SEC monitor the adequacy of the brokerages’ computer capacity.

The study also found that online brokerages sometimes failed to follow rules requiring them to furnish investors with information relating to margin loans, privacy information, trading risks and the right of investors to specify which dealers execute their trades. Online brokers often route trades to favored dealers without checking first to see if another firm may be offering a better price.

Investors are most likely to complain, however, when they can’t access their accounts, the problem that the SEC hears about most frequently, said the study.

Data collected over 17 weeks by the GAO showed there was a greater chance that orders would either not be executed or would be executed at an unexpected price if it took investors a long time to enter a stock trade. One investor lost up to $6,000 in a two-day, unsuccessful effort to submit a sell order through a major online firm’s Web site.

Officials at two firms told the GAO they have reimbursed customers more than $1 million for losses due to outages. But many other firms refuse to compensate customers’ losses resulting from technical failures, the study said.

The online brokerage world is, in many ways, the victim of its own success. From the end of 1997 to mid-1999, the number of online brokerages more than doubled to about 160 firms, and the number of online accounts nearly tripled, to 10.5 million. Eleven firms told the GAO they plan to spend $1 billion on advertising to bring in even more customers this year.