The unprecedented crush of stock trading this week has overtaxed not only the computers that operate the major exchanges but also the humans who carry out orders. It has triggered frustrations and complaints and raised the likelihood of more lawsuits by investors angry with their brokers.
Investors complained that their brokers have been hard to reach and are executing sales too slowly, often worsening a financial loss. And lawyers say that Monday's historic price collapse forced brokers into quick judgments that might haunt them in court.
Brokerage houses, faced with triple or quadruple the usual number of calls from clients, have thrown vice presidents and secretaries into the breach to confirm orders and apologize to customers well into the evening.
'Hawaii at Christmas'
The securities industry tried to put the best face on the situation, insisting that it has received relatively few formal complaints and that the system performed well under what were unprecedented circumstances. But officials admit to severe problems.
The crunch apparently hit extra hard at discount brokerages, where fees are lower but no investment advice is offered and brokers have between 300 and 400 customers apiece.
"To me, it's similar to flying to Hawaii at Christmas," said Hugo Quackenbush, senior vice president for marketing at Charles Schwab & Co. of San Francisco, a discount brokerage whose 105 branch offices were deluged with calls that couldn't be handled. "Not everybody is going to get on the plane, and the guy who doesn't is going to be mad."
Some full-service brokers claimed they were swamped with investors fleeing the discount firms because they couldn't get through to a broker and, moreover, because investors may suddenly need investment advice.
But the problem was industrywide. E. F. Hutton moved Thursday to allay customer "confusion" by keeping its 400 branch offices open late Friday and all day Saturday.
Also hard-hit was the over-the-counter stock market, where small investors and small companies predominate. Traders complained that, on Tuesday in particular, tens of thousands of transactions were either delayed for several hours or not executed at all because brokers didn't answer the phones.
The National Assn. of Securities Dealers, which regulates the OTC market, said it wasn't that bad. But it felt compelled to issue an advisory to its trading firms, reminding them that they are obligated to answer the phones and handle orders. It warned that abuses would be reported to its surveillance committee.
"We've handled twice our normal volume and triple the normal number of transactions, which suggests a lot of transactions are being executed," said NASD spokesman Douglas Parillo. "To the extent you can get through the backlog on the phones, orders were being executed."
Like Charles Schwab, NASD said it has already launched a study of better ways to handle such heavy volumes of trades by individual investors. Said Parillo: "The fact that there has been this unprecedented activity suggests that it could recur. We want to be prepared."
The New York and American stock exchanges said formal complaints have been relatively few so far, but are increasing along with the number of shares traded. The most frequent complaint is that trades aren't executed at the price cited by the investor, delays that in this week's volatile market can mean penalties in the thousands of dollars.
Such disputes, increasingly common as volume has climbed in the wake of computer-programmed trading, are sorted out on an individual basis by checking the times orders were placed and clocking prices that day, said Richard Torrenzano, a vice president of the New York Stock Exchange.
The exchange recommends a series of steps that disgruntled investors can take, starting with the individual broker and finishing with the arbitration system conducted by the NYSE.
The phenomenon of brokers simply being inaccessible, for whatever reason, raises serious questions about the industry's obligations to investors, according to lawyers who have specialized in malpractice and other cases against brokers.
"The little guy's calls won't get answered because in a frenzy, the big fish get fed first," says New York attorney Andrew Berger. "If you miss a swing in the market because of that, does the customer have a remedy? I'm not sure. A broker has got to execute an order in a reasonable fashion. In this market, what's reasonable might not be the same as what was reasonable a couple of weeks ago."
Fallout May Be Slow
Says Charles Schwab's Quackenbush: "The obligation is a fundamental business proposition of best efforts. We are doing the best we can."
Relief for investors who feel wronged by their brokers has been at the forefront of legal debate in recent years. In June, the U.S. Supreme Court backed the securities industry in ruling that investors who sign the standard securities contract for arbitration of disputes cannot sue their brokers in federal court.
Lawyers say the legal fallout from this week's dramatic events probably won't start to emerge until the market settles down and investors figure out how they did. In some cases, for example, investors who were unable to reach their brokers Monday afternoon might have been better off because of Tuesday's rebound. In other cases, they might tend to blame the broker because prices fell.