The Internet is taking Wall Street by storm. Small and aggressive companies are offering the ability to trade via the Internet, charging investors a fraction of the fees of full-service brokers or even conventional discount brokerage firms. But let the buyer beware: The technology has again left regulators in the dust, so be very careful.
The appeal of the Internet connection is easily stated: much lower cost to stock buyers and sellers and the ability to trade at any time. That isn't the problem. The Internet is also a huge source of free or low-cost investment information. The hazard comes in when the information is inaccurate, and perhaps deliberately so.
Consider the recent example of a little-known and money-losing electronics firm. Suddenly, computer chat rooms, bulletin boards and computer discussion groups were full of misinformation and hype about the company.
Some 449 million shares of the company's stock changed hands in three days. Its market value soared from $36 million to $1 billion over that period, leading regulators to halt trading and begin an investigation. Now the Securities and Exchange Commission has filed a lawsuit against the company. The firm denies having had any knowledge of misinformation, but the SEC accuses it of industrial espionage, lying about its finances and cheating investors.
The SEC and the National Assn. of Securities Dealers are worried about the ease with which the Internet can be used for insider trading and the manipulation of markets. But neither the SEC nor the NASD is up to the task of fully monitoring the Web. Both have only a few regulators and analysts for that duty.
What's surprising here is that the continual disclaimers about misinformation in all areas of the Internet have not yet sunk in and bear repeating again and again. "People should be buying stock based on the company's financial status and business prospects, not because somebody they don't know talked about it on the Internet," Gary Sundick, associate director of the SEC's enforcement division, said.
If it's foolish to self-diagnose a medical or psychological problem based solely on information found on the Internet, how could it possibly make any sense to risk the nest egg solely on a cyberspace stock tip?