Privacy, Transaction Delays at Issue in Online Trading, SEC Says

A federal study of brokerages offering online trading finds the services sometimes risk the privacy of investors’ personal information and fail to ensure customer orders are executed at the best price.

The Securities and Exchange Commission, prompted by an explosion in Internet trading and rising customer complaints, did a top-to-bottom review of large, medium and small firms.

Without naming firms or taking specific action, the SEC staff report said the online services should also examine the quality of information they give customers, the objectivity of their advertising and the robustness of their computer systems.

“With respect to e-mails, the staff observed many instances of confidential information being sent without any security measures, including account numbers, passwords, Social Security numbers or details of trades placed,” the report said.

There are more than 200 broker-dealers providing online trading services to over 7.8 million retail investors, according to figures cited by the SEC. Those investors are making more than 800,000 trades a day.

The SEC received more than 4,000 complaints from online investors in the 12 months ended Sept. 30, compared to 259 complaints in the comparable period in 1997.

The most common gripes by online investors included failures or delays in getting their orders processed and difficulty in accessing their accounts, the SEC said.

The SEC said firms should evaluate their advertising to make sure investors’ hopes for riches are not inflated, and they should clearly spell out the risks of buying stocks on margin, where money is borrowed from a broker to buy shares and the investment is used as collateral.

Dan Hubbard, a spokesman for Charles Schwab Corp., the No. 1 U.S. discount and Internet broker, said: “We believe it’s a constructive report and that many of its best practice recommendations are based on practices already in place at Schwab and we’ll continue to study the specific details.”