Discount broker Charles Schwab & Company is going ahead with plans to open a stock-trading system on the Web this spring, saying it is not concerned about the voluntary suspension of another company's online trading service because of questions raised by the Securities and Exchange Commission.
The Schwab site will let customers trade shares over the Net through either $1,000 or $5,000 accounts. The company announced the plan despite the suspension of trading on a Net-based bulletin board by a New York microbrewery this week after SEC lawyers raised legal and technical questions about its system.
Questions about the Spring Street Brewing Company do not apply to Schwab because the two firms' services are "apples and oranges," said Tom Taggart, a spokesman at the brokerage house's San Francisco headquarters. "Spring Street is an issuer, a corporation--not a broker-dealer. There's a big difference. As a licensed broker-dealer, we're authorized to trade securities."
Taggart said Schwab is the only brokerage firm of its size that is trading on the Net in substantial volume.
Spring Street launched its Wit-Trade bulletin board March 1 to let the public buy and sell its common stock through its Web site. The company voluntarily suspended trading this week after the SEC called with a list of questions, including whether such a system would let potential buyers use the Net to post phony bids and manipulate the price of the stock, according to Spring Street founder and CEO Andrew Klein.
The brewery has fielded calls from at least 50 other companies interested in setting up comparable systems for their stocks, Klein said. But before they follow Spring Street's example, the company will have to work out solutions to two main problems.
First, the SEC wants to require the company to out-source the functions that make the online transactions binding agreements to a registered broker or dealer. This objection is easily resolved if the company itself registers to become a broker, Klein said.
The technical problem, however, may prove more daunting. Because the company has no way of policing who's at the end of a given email address, unscrupulous buyers could send in bids from multiple accounts to create a perception that the stock is moving up or down--and thus manipulate the price to their advantage.
As the problem is not related to Internet security per se, Klein says he knows of no technological answer. One suggestion now on the table is to use Wit-Trade to post the trading history for the stock but to make actual transactions over the phone.
Taggart said Schwab is able to overcome such security obstacles because, as a licensed broker and dealer, his firm is equipped to screen and monitor transactions to avoid such problems as fraudulent orders. He said Schwab requires investors to sign account applications and pay for their shares before the transactions are actually made.
Investors may get further protection by a proposed security system announced this week by the National Association of Securities Dealers. Although details have yet to be worked out, the self-regulatory trade group plans to post background information on the Net about more than half a million brokers and brokerage firms.
In the meantime, Klein said the SEC is working closely with Spring Street to help the company develop a feasible online trading system. "The SEC is fully in support of our creating a trade mechanism and our use of the Internet to do that," he said.