Brokers Tighten Rules for Internet Stock Investors
Brokerages are making it tougher for individuals to use borrowed money to invest in volatile Internet stocks, a reaction to huge price swings in shares of tiny companies that are nowhere near making a profit.
Salomon Smith Barney imposed new restrictions on shares of 18 companies, a source who demanded anonymity said Tuesday.
And at least five online brokerages have increased margin requirements on Internet stocks since mid-November, citing volatile prices and heavy volume. Waterhouse Securities Inc. has raised margin requirements on an “unprecedented” 24 stocks--20 of them Internet-related--within the last two weeks, said John Chapel, president of the No. 3 online brokerage.
The moves come amid a trading frenzy that has seen market darlings such as America Online and Yahoo double since early October, while shares of virtual unknowns have doubled and tripled in just a day with little more than an announcement of a new Web site.
Along with Waterhouse, at least four other online trading companies--Ameritrade Holding Corp., Donaldson, Lufkin & Jenrette Inc., E-Trade Group Inc. and SureTrade Inc.--have also raised margin requirements on some Internet stocks. A spokesman for Charles Schwab Corp., the largest U.S. online broker, said it hasn’t increased its 35% margin requirement and still examines margin levels on a case-by-case basis.
The stocks on the Waterhouse list include online bookseller Amazon.com Inc., online auctioneers EBay Inc. and OnSale Inc., Web directory Yahoo Inc., online “community” Theglobe.com Inc., and several companies establishing Web storefronts, including K-Tel International Inc. and Books-A-Million Inc.
“I would say that the numbers are unprecedented for us,” said Chapel, whose brokerage, now a wholly owned subsidiary of Toronto-Dominion Bank, was founded in 1979. “The last time I saw anything like this was during the biotech craze of the early 1990s . . . but that was only 10% to 20% of the breadth of this.”
New York-based Waterhouse raised its standard 35% margin to between 40% and 50% for the 24 stocks on its list. Margin requirement is the amount of cash an investor must have on deposit in order to buy or sell stocks using borrowed money.
Chapel said the size of Internet stock price swings led him to boost margin requirements, and he will monitor and adjust the list each day based on trading results.
“The depth of this is so broad and there’s so much interest and so much money was flowing into it that I decided to do this so the people may be a bit more conservative,” Chapel said.
Stocks such as Amazon.com, Yahoo and Theglobe.com have seen price swings of 20 or more points a day in the last two weeks, and the Interactive Week index of 50 Internet stocks is up 89% this year--it rose 16% just from Nov. 13 through Friday.
