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Glitch Idles E-Trade Customers

2/4/1999

Washington Post

Thousands of customers of E-Trade Group were frozen out of the stock market during peak trading hours this morning, when the start-up trading house that rode technology to become a major player in the securities business was frozen by a software glitch.

At 10:15 a.m., customers trying to buy and sell stocks online and through an interactive voice-recognition system were informed that “system enhancements” were blocking access to their accounts. After nearly an hour, customers were able to make trades through the automated phone service. But problems persisted off and on all day for the World Wide Web service, which processes nearly 80,000 trades on peak days.

Many angry traders spent their unwanted sabbatical blasting the brokerage online, swapping tips on which competitors to go to, how to complain to the Securities and Exchange Commission and even broaching the subject of lawsuits.

One customer said an order to sell $100,000 worth of a stock could not be processed, resulting in more than $1,000 in losses. “It is clear that Etrash continues to suffer from technological deficiencies and trade mistakes that are costing customers untold losses,” the customer wrote on a popular message board. “I would encourage all shareholders to contact the SEC to report this potential egregious violation of securities law.”

The crash underlined the foibles of high-tech trading even as online investing skyrockets. Credit Suisse First Boston estimates that online brokers’ customer trading volume rose 25 percent in January, and now accounts for one in four trades.

Among the biggest gainers of the trend was E-Trade, a Palo Alto, Calif., company founded in the early 1980s by inventor Bill Porter, who wanted to trade stocks for himself. Two years ago it launched electronic trading directly on the Internet, taking out full-page ads with bold letters proclaiming, “Your broker is now obsolete.”

E-Trade, with 676,000 customers, now has $88 million in revenue. In three months, it has processed 2.8 million trades.

But for a time today, the only way to work with E-Trade was the old-fashioned way, with live brokers taking orders — over the telephone. Many observers likened it to the woes America Online Inc. faced when a burst of new customers tied up telephone lines and crashed its system.

“I think they’re a prisoner of their own success,” said Philip Aidikoff, a securities lawyer.

Shares of E-Trade, which soared from about $6 in October to a high of nearly $63 this month, fell $3 today to close at $55.25.

The setback occurred just a week after SEC Chairman Arthur Levitt Jr. disclosed 330 complaints about online transactions that could not be processed, blaming much of the problem on firms accepting more business than they could handle. An SEC spokesman declined to comment on E-Trade’s woes today.

E-Trade attributed the problem to a malfunction of new “trading functionality” software installed Tuesday night. “It was not related to volume or capacity,” spokesman David Murray said.

Many customers were not happy with the explanation. Calling E-Trade the “Bill Clinton of online brokerages,” one customer asked in a chat group: “Who upgrades any major computer system during normal business hours?”


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