Shorted Circuits at Electronic Brokerage
Mark Robertson spent most of last Wednesday morning trying to get into his Internet trading account through E-Trade Group Inc.’s World Wide Web site.
When he finally got through, he sold the E-Trade shares he’d bought almost a year ago.
The full-time investor in Raleigh, N.C., was betting against E-Trade because of the online brokerage’s problems handling the huge volume of trades in last Tuesday’s rally that followed the previous day’s 554-point drop in the Dow Jones industrial average.
“I think they’re really going to get a lot of backlash over this,” he said.
E-Trade executives said they had to limit access during that rally--the biggest U.S. stock market rally ever. The access limits prompted a wave of complaints.
As Internet brokerages such as E-Trade dust themselves off after last week’s wild ride in the markets, online investors are debating the extent of the problems and the way the brokerages handled them. (A survey released by TheStreet.com showed its readers were very much unsatisfied with the performance of electronic brokerages.)
E-Trade, the pioneer of stock transactions over the Internet and a company that went public in August 1996, is drawing scrutiny and some of the most vocal critics on Internet bulletin boards such as Silicon Investor.
Dan Olivo, a software salesman in Houston, said he couldn’t get into E-Trade’s Web site last week on Tuesday or Wednesday mornings because it wouldn’t accept his password. The 40-year-old investor said he waited two hours to reach an E-Trade customer representative.
Olivo said he has encountered similar problems with E-Trade at least four times since opening an account nine months ago.
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Some investors were further angered that the company sent a letter to customers touting the performance of its service last Monday.
“There are a lot of customers who are mad at us,” E-Trade President and Chief Executive Christos Cotsakos said in an interview. “There was a huge amount of frustration, and we apologize for that.”
The company said it got about 2,000 e-mail messages from customers after last Tuesday, mostly complaints about service.
E-Trade, like many online brokerage operations, was overwhelmed by record trading volumes on that day, which saw the Dow average bounce back from the 554-point plunge of the previous day.
Even though the online brokerage boosted the number of people who could use its system at one time to 15,000 from 10,000 in preparation for the onslaught Tuesday, it wasn’t enough, E-Trade executives said.
E-Trade executives said twice as many customers as typically use the service were using it at peak times and that they were staying online an average of 45 minutes instead of the usual 5.
To prevent service from becoming too slow, the company decided to limit access to 7,000 users at one time, which meant some E-Trade customers couldn’t get into the brokerage’s computers even if they managed to get to the Web site.
E-Trade plans to spend an additional $25 million over the next 12 months to address the situation.
“Service levels matter,” said Dan Chung, an analyst at New York-based money manager Fred Alger Management, which owned about 92,000 E-Trade shares as of June. “I am going to monitor the situation.”
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Some analysts and investors think the criticism E-Trade has drawn won’t affect the company’s growth.
“E-Trade seems to have a cult of people out there who don’t like them but continue to use them,” said Mark Wolfenberger, an analyst with Deutsche Morgan Grenfell who has a “buy” rating on the stock. The stock is up 185.33% year-to-date, but it took a drubbing last week. This week, it closed at $32.81 on Monday, up $1.94. That’s down from its high of $47.88, reached in September.
Wolfenberger said he was concerned about customers defecting from E-Trade a year ago because of complaints about poor service and access problems, but he has seen no effect on the firm’s financial performance.
The company’s position as a pioneer in electronic brokerage service and its well-known name may also have something to do with the complaints.
“We’re the flagship, the leader, but we’re also the lightning rod” for criticism, Cotsakos said.
