SEC Chairman Levitt Cautions Online Investors

(January 28, 1999)   SEC Chairman Arthur Levitt released a statement on Wednesday, January 27, cautioning online investors about the risks of electronic trading.   The SEC has received a 330 percent increase in the complaints it has received concerning online trading in the last year.

"On-line brokerage accounts account for approximately 25 percent of all retail stock trades. And, the number of on-line brokerage accounts is expected to exceed 10 million by the end of the year," said Securities and Exchange Commission Chairman Arthur Levitt.  He added that as online investing has become more common, so have the number of investor complaints.  Levitt stated that "the number of complaints concerning on-line investing has increased 330 percent in the last year."

Levitt suggested that many online trading problems would not arise if investors followed several practices.  First, online investors still need to follow the basics of investing. "An investor's consideration of the fundamentals of a company -- net earnings, P/E ratios, the products or services offered by the company -- should never lose their underlying importance."

Levitt also discussed problems associated with delays in trade executions and stock price volatility.  For example, he stated:

"You may occasionally experience delays on these new systems. Demand has grown so quickly that many firms are racing to keep pace with it. In the meantime, you may have trouble getting on-line or receiving timely confirmations of trade executions. You should not always expect "instantaneous" execution and reporting. There can and will be delays in electronic systems. You should investigate and understand options and alternatives to executing and confirming your orders if you encounter on-line problems."

He also cautioned against engaging in such practices as day trading and trading on margin.

Levitt concluded:

"The SEC will do everything it can to protect and inform investors during this time of great innovation and change. But, investor protection -- at its most basic and effective level -- starts with the investor. I say to all investors -- whether you invest on-line, on the phone, or in-person -- know what you are buying, what the ground rules are, and what level of risk you are assuming."