Schwab Restricting Some Online Trades of Volatile Stocks
In the latest move to rein in the frenzied investment habits of some customers, Charles Schwab Corp. confirmed Friday it has begun occasionally limiting electronic trading of certain Internet and other fast-moving stocks.
The No. 1 discount brokerage firm said that on some days it will suspend online trading in highly volatile stocks. Investors can still trade those securities through a telephone broker, paying the reduced commission normally available only to customers trading via computer, or in person at a Schwab office.
Heavy trading volume in certain highly sought-after stocks has recently caused trades to be filled at prices far different from those expected by customers, Schwab said. For example, in an extreme case, someone seeking to buy an initial public offering priced at $10 per share might end up paying $50 or more, the San Francisco-based company said.
The list, which can change daily, on Friday included only one stock: InfoSpace.com Inc., which is slated to go public soon. The duration of the temporary bans, which can last for a day or longer, depends on trading activity and news surrounding the stocks.
Last week, Schwab and other brokers boosted margin requirements on certain volatile stocks. In effect, it required customers who borrow money from the firm to buy risky stocks to put up more collateral to do so.
The furious surges of many Internet stocks in the last month have been fueled in part by momentum-hungry individual investors buying stocks they think are certain to soar immediately. But many place “market” orders, which instruct brokers to buy a stock at the prevailing market price, thus giving up control of the price they pay when the order is eventually executed.
“The move says more about the craziness of the current trading environment and retail Internet trading than about any shortcoming of Schwab or electronic trading in general,” said James Marks, an electronic-commerce analyst at Deutsche Bank Securities in New York.
Analysts added, though, that Schwab’s latest move shows the firm would be happy to get rid of aggressive individual investors who rapidly trade in and out of stocks. Schwab announced the move in a message to Internet customers Thursday night.
Though frequent traders generate hefty commissions, their accounts are less profitable than is commonly believed, experts said. Brokerage firms make more money from granting margin loans and reinvesting cash in customer accounts.
What’s more, brokerage firms are worried about rules requiring that they make sure investors understand the risks they’re taking. If customers sue after incurring losses in risky stocks, they could argue that brokers let them buy unsuitable securities.
Also, brokerages must absorb any losses that occur when stocks drop and customers default on their margin loans.
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