E-Trade Hopes to Lure Clients With First Broker Chat Room

Internet brokerage E-Trade Group, looking for new ways to draw investors to its World Wide Web site, will be the first broker to start an investor chat room.

The Palo Alto-based discount brokerage will open the chat room today for use by friends and family members of the firm’s employees, said Henry W. Carter, an E-Trade vice president.

E-Trade will fine-tune the forum and open it to the firm’s 400,000 customers and other investors this summer, Carter said in an interview after his presentation at a National Assn. of Securities Dealers conference in Washington.

The potential upside for E-Trade, of course, is that the chat room may attract new customers to the brokerage. Given the increasingly cutthroat nature of discount brokerage, competitors need every advantage they can get.

But the move is controversial because regulators already are battling promotion of worthless stocks on existing chat rooms and other Internet sites. In one of the biggest cases to date, former Systems of Excellence Inc. Chairman Charles Huttoe was sentenced to 46 months in prison last year after pleading guilty to making $12 million by paying an electronic newsletter to tout his stock.

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Much of what appears on chat rooms is hype, and it’s hard to tell what the people’s financial interests are,” said John Markese, head of the American Assn. of Individual Investors.

Of course, chat rooms also serve legitimate purposes, allowing investors to exchange ideas and intelligence about stocks and investing topics in general.

Still, regulators have said privately that E-Trade could be liable for securities violations involving misleading information that appears in the chat room, and for recommendations that lead to unsuitable trades by other investors, Carter said. He’s been meeting with the Securities and Exchange Commission, NASD and the states in an attempt to adapt the chat room to securities rules.

The E-Trade chat room is to be used by investors to swap information and views about stocks, while prohibiting sales pitches, Carter said. It will be moderated by non-brokers who will ensure that investors aren’t trying to buy or sell stocks or manipulate securities.

Only stocks traded on an exchange or on Nasdaq are to be discussed. Investors will not be permitted to discuss small, thinly traded stocks.

Also, E-Trade will ask all investors who participate in the chat room to provide their names and addresses in advance, and to sign a contract promising not to use the chat room to buy, sell or manipulate stocks. The firm will publish a disclaimer saying it is not responsible for views expressed in the chat room. E-Trade will also keep records of all messages sent.

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Discounted Stocks, Too

Shares of discount brokerages have pulled back sharply from their 52-week highs, in part on worries about soaring competition for online trades. A sampling:

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52-week Thurs. Brokerage Ticker high/low close Ameritrade Holdings AMTD $39.00/13.38 $31.81 Charles Schwab SCH 44.25/23.31 35.00 E-Trade Group EGRP 47.88/15.00 22.25 Natl. Disc. Brokers NDB 18.50/10.00 11.50 Siebert Financial SIEB 19.00/1.31 10.19

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Source: Times research