Web Trading Grows Into Major Force

Notes of interest from a business editors conference last week in the other Washington …

One of the next major regulatory minefields will involve how much more policing will be done of Internet trading, especially rapid-fire day trading.

The growth and rate of growth are astounding.

“There are an estimated 40 million Internet users now and one-quarter of all trades are now done online — and that could be an understatement,” said Mary Shapiro, the top regulator for the National Association of Securities Dealers.

“And there was a 49 percent increase (in online stock trading) from the end of the last quarter of 1998 to the end of the first quarter of 1999,” she added.

“As the champion of the little guy, the ‘90s have been very good,” Shapiro said. “But one of the key danger zones is rising investor expectations, such as expecting most stock trades to be made in one or two seconds, not nine or ten.”

Advertising by brokers should not over-promise, in either performance or results, said the NASD official who jokingly identified herself as “Mary `The Sheriff’ Shapiro.”

“You can’t say you’re the best or fastest unless you can demonstrate that,” she said, noting the NASD has tracked 811 misleading ad claims in the past 12 months, bringing 23 formal disciplinary actions.

Concerning fraud with Internet trading, she said, “The techniques are not particularly novel. There’s just a new set of tools.”

In advocating having disclaimers about Internet trading, Shapiro admitted, “We can’t be the watchdog for all human frailties. We can’t protect people from their own folly.”

On a later panel, Richard Walker, the new director of enforcement for the Securities and Exchange Commission, agreed on the need for increased surveillance.

He said there have been 68 cases of fraudulent Internet trading since 1995, and 38 of them were last year. “Same scams, new medium,” Walker said.

He said the SEC receives 200 to 300 messages a day on its online complaint center. One area of concern is illegal touting, where those endorsing a stock do not disclose that they were paid to do so. A “nationwide sweep” last October resulted in 23 cases naming 44 respondents and defendants accused of illegal touting.

Another concern is “pump and dump” manipulations, in which a stock price is deliberately driven up with the idea certain investors will bail out early and profitably.

While Walker and Shapiro addressed business editors, SEC Chairman Arthur Levitt Jr., in a speech at the National Press Club, criticized “irresponsible” ads that raise “unrealistic expectations.” He promised increased online policing to protect “amateur traders.”

Harvey Houtkin, the self-proclaimed “father of electronic trading,” cautioned against over-regulating Internet trading.

“Why are all these people trading now?” Houtkin asked. “Because they can.”

He claims high-speed day trading (he prefers “active trading”) actually has less risk, not more than conventional trading, “because day traders can get out fast” if a stock falls.

On other topics at the conference …

World Bank Group President James D. Wolfensohn said Russia, Korea and other areas with significant fiscal problems “need bankruptcy laws, honest judges and banking supervision that works.”

Wolfensohn said it is “critical for business to understand issues of social responsibility. It’s good business. It’s peace.”

He added: “There’s bombing today in Kosovo, but how do you keep stability in the surrounding countries? Every time I see a bomb drop, I think they’re going to come to us (the World Bank) for another $50 million.”

U.S. Trade Representative Charlene Barshefsky said that despite contentious issues such as nuclear espionage, she is hopeful China will gain membership in the World Trade Organization.

She noted the active interest of Chinese Premier Zhu Rongji and the timeliness of WTO approval in the centennial anniversary year of the 1899 Hay open-door policy (“essentially a trade policy”).

China has been trying to gain WTO membership for 13 years, and just last month, perhaps to ease its entry, lifted import barriers on beef, citrus and Northwest wheat.

“If WTO membership doesn’t happen this year, it won’t for many years,” Barshefsky said.