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Byline: Deborah Adamson Daily News Staff Writer

Hala Gabriel had a good feeling about eBay.

She believed that the Internet auction company was going to skyrocket on its first day of trading last fall.

On the morning of eBay's initial public offering, Gabriel turned on her computer and tried to access her online brokerage account. She couldn't get in.

At first, she didn't know why. Did her password crash?

Then she heard that her online broker was having technical problems with its Internet site. She - and thousands of other customers - couldn't make a trade. Gabriel watched the price of eBay steadily climb.

Eventually, she reached her broker via telephone. But by that time, eBay had risen from $24 to $50 a share - out of her reach.

``When the system gets overloaded with other people, it freezes,'' she said. ``You can't log on. You're trying to get into your account, and you can't.''

Like Gabriel, online investors are finding out that despite the ease and affordability of trading over the Internet, the path has its perils.

As more people trade online, traffic jams on the information superhighway inevitably lead to technical problems at online brokerage firms.

While high-tech difficulties aren't common, sometimes it only needs to happen once to cost investors money - whether it's the inability to get out of a stock or missing a buying opportunity.

Online broker E-Trade is being sued by an Ohio woman whose buy orders over the Internet weren't executed for almost an hour. When the order confirmations came through, she found out that she had purchased the stocks at much higher prices than she wanted. Her attorney estimates her loss to be $40,000.

That's why, industry watchdogs and savvy investors say, people should have a contingency plan when their online brokerage is offline.

In the past year, investors were put on cyberspace hold as the online services of some big names - Charles Schwab, E-Trade and Ameritrade, to name just three - went dark for minutes and, in some cases, hours. Several brokers have announced that they're ramping up systems to accommodate big volumes. But analysts warn that glitches still will occur.

``Even the best businesses in the online trading sector are affected by technology problems,'' said Doug Gerlach, New York-based author of ``The Complete Idiot's Guide to Online Investing.''

Arthur Levitt, chairman of the Securities and Exchange Commission last week said ``almost none'' of online brokerage account agreements discuss trading risks and alternatives to customers if the system goes down.

Online brokers need to make sure their computer systems can accommodate the growing number of investors, Levitt said. Brokers have a legal obligation to efficiently execute trading orders.

Past technical glitches have led to investor unhappiness.

An onslaught of investor complaints has led the New York Attorney General's Office to announce an inquiry into online trading firms to determine their technological capacity, contingency plans, and execution and processing of customer orders.

Such complaints aren't surprising, given the traffic online.

Last year, Americans opened 7.5 million online accounts, a whopping five times more than the number of accounts opened in 1996, according to Gomez Advisors, a Concord, Mass.-based e-commerce research company.

This year, Americans are expected to have 10.5 million online accounts. For 2000 and 2001, the estimates are 14 million and 18 million accounts respectively.

Investors flock to the Internet because they are attracted by easy trading and low commissions - ranging from $5 at Brown & Co. to $29.95 at Charles Schwab.

There are more than 110 online brokers from which to choose, said Frank Lallos, senior analyst at Gomez.

In the fourth quarter of 1998, online trading volume rose 34 percent to 340,000 trades per day, according to Credit Suisse First Boston in New York.

In the first quarter of 1999, volume grew by more than 30 percent to about 450,000 trades.

Today, one out of every seven trades are executed online.

But when the market swoons, such as in October 1997, trading volume skyrockets and makes it difficult for many online investors to get through.

Sadly, investors often learn a lesson about the shortcomings of cyberspace trading the hard way - by losing money when the system is down.

However, with a little planning, it doesn't have to be quite as painful.

Here are some recommendations from Gerlach:

No. 1: Open a second online brokerage account.

If the main broker can't respond, maybe the back-up brokerage is available. Be mindful of the deposit requirements though: Most brokers insist on a deposit of $1,000 to $2,000 into an account before they'll execute a trade. Some brokers even ask for $5,000 to $10,000.

No. 2: Ask the broker for alternatives when technical problems come up.

In many cases, the second option is an automated touch-tone phone system or fax. There are also live brokers on the other end of a phone call for those who can wait.

Ask about fees for making a trade by phone or fax. Don't assume they're all at the same low online rate. Often, they're not.

For example, Ameritrade charges $8 per online trade. But it's $12 for touch-tone phone orders. Broker-assisted and faxed orders are $18 each.

But be warned that touch-tone ordering isn't full-proof either.

Last Thanksgiving, Mario D'Alfonso of Glendale bought Books-A-Million, an Internet bookseller, for $28 a share and sold it at $31.50. Or so he thought.

He was surprised to find his sell order executed at $26. That means his profit of $5,000 became a loss of $3,000. He complained to the brokerage firm, which rectified the mistake because his order was recorded.

No. 3: It's a good idea to get a broker with an office nearby.

Many online brokers transact business by mail, fax, e-mail or phone.

But it's better if there's an actual office. Customers can go to the office and refuse to leave until the problems are fixed. Note that many popular online brokers such as ETrade don't have offices. However, discount brokers such as Waterhouse ($12 and up a trade) and Charles Schwab have offices in the Valley.

No. 4: Sign up with a back-up Internet service provider.

The broker's not having problems, but the ISP is experiencing high calling volume and won't let the investor log on. The access lines are always busy.

Get a second Internet account with a different company. A free service is offered at Westlake Village-based, but users have to look at ads while surfing.

Check out AOL's Bring Your Own Access Plan program as well. For $9.95 a month, investors can use AOL's local access lines at a $2.50 per hour rate in case of emergencies. Using the toll-free number costs $6 an hour. For more information, call (800) 827-6364.

One online broker that's popular with daytraders - Datek ( - offers a dial-up connection that lets an investor's computer bypass the Internet and hook up directly with its system in New York. Investors get access to their accounts and can place trades. The cost is a long-distance phone call.

No. 5: Sign up with lesser-known brokers.

Popular brokers such as Schwab or ETrade attract a big following. Since there are more than 110 online brokerages, why not pick a place that's less crowded?

ScotTrade (, Web Street ( and InvesTrade ( are some lesser-known companies.

Investors who are nervous about an unknown should go to to check on the company. The site lists complaints against brokers and is maintained by the National Association of Securities Dealers, a regulatory agency. Sign up for a free report about a brokerage firm.

No. 6: Ask about any restricted stocks.

Brokers limit trading on a number of Internet stocks - AOL, Yahoo! and eBay to name a few - because of trading volatility. Believe it or not, certain Internet stocks cannot be purchased online even if investors aren't trading on margin. Ameritrade, for example, restricts trade on 104 Internet and technology stocks.

Waterhouse Securities' WebBroker service recently prevented AOL from being bought online. For investors who didn't know this beforehand, it's a rude awakening to log on, wait for the computer to load, try to trade and receive an error message. A few weeks later, WebBroker customers could again buy America Online, much to the chagrin of customers who paid extra for a phone-in purchase.

Brokers also have raised their margin requirements for certain Internet stocks. Last fall, Ameritrade raised its margin requirements for 40 Internet stocks from 30 percent to 50 percent.



PHOTO (Color) Hala Gabriel is an avid online investor, but she lost out on a good profit on eBay stock when technical trouble crashed her broker.

John McCoy/Daily News
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Title Annotation:BUSINESS
Publication:Daily News (Los Angeles, CA)
Date:May 10, 1999

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