Wall Street trades pit for the Net

Three years ago, Andrew Klein left Wall Street for a different kind of liquidity: beer.

In starting up a boutique microbrewery in a cramped SoHo storefront, the last thing the former securities lawyer thought he would do is return to the world of fast trade and high blood pressure. But that's exactly what he did in March when he created a Web-based system to buy and sell shares in his Spring Street Brewing Company.

Now, the 36-year-old New Jersey native has drawn the attention of brokers, investors, federal regulators, and the news media by proposing to expand his enterprise even further--to build a licensed stock exchange that trades entirely on the Internet.

"You can buy and sell stock all digitally, without ever paying brokerage or commission fees," Klein said. "This is a complex and gigantic joint venture that is well beyond the terrain of a little beer company."

That may be the understatement of the year. While the prospect of doing business online has inspired many companies to explore the Internet, the merging of the mega-dollar investment industry and the Web could elevate the stakes to stratospheric levels.

So it should be no surprise that Klein's circuitous electronic path to Wall Street is being followed by scores of other firms in both Silicon Valley and Manhattan that are starting to move investment and other financial services to Internet trading floors.

In the last few days alone:
--America Online and CompuServe announced new investment-related services for their subscribers.
--Intuit started an online financial information service to capitalize on the personal software giant's Quicken application.
--Charles Schwab and several other brokerage houses expanded their Internet services to stay competitive with their online counterparts.

The burgeoning cybermarket is even creating a whole new support industry, including a service announced Wednesday that gives users the feeling of the real thing: live images and sounds from the trading pit. It's called, of course, "Virtual Wall Street".

"We think there's going to be a fundamental change in the way people conduct personal finance, and we think that technology is going to herald the way," said Eric Roach, chief executive of Lombard Institutional Brokerage. The San Francisco discount brokerage announced Thursday that it plans to spin off its 18-month-old technology unit this summer to expand its Web business.

The rush to online trading is basically inspired by an old idea: cutting out the middleman. In recent years, investors who buy stocks and the companies that sell them have become increasingly frustrated with Wall Street's traditionally exclusive trading system and the hefty transaction fees that go with it. As a result, investors have turned to discount houses like Schwab and electronic brokers like E*TRADE to lower commission costs and other expenses.

What is new, however, are strong indications from the Securities and Exchange Commission that the federal government will not stand in the way of direct Web-based trading between company and investor. After raising initial legal and technological questions about Spring Street's electronic bulletin board, for example, the agency appeared to give conditional approval to the trading system.

That's what the bulls and even some of the bears were waiting for to begin their charge from the Big Board to the Net.

"We've gotten a lot of inquiries," said Bob Colby, deputy director of the SEC's division of market regulation. "There's been a lot of publicity, and people have begun to think about the potential."

In many ways, cyberspace would seem the perfect environment for the stock market. Much of the Internet's appeal is born from its ability to connect people directly at any time for any reason, instantaneously. For the securities business, where speed and information are everything, no other medium can compare.

But whether the Internet will become the channel of choice for individual investors remains to be seen. Most people rely on their brokers both to provide advice and handle their transactions, and many still want to speak to a live person when gambling with the milk money.

"If you're talking about your life savings, who are you going to give your money to?" asked Tom Taggart, spokesman for Schwab's headquarters in San Francisco. "People want to talk to a live broker in a branch office. They want to know where their money is. It's just human nature."

So his company and many others must try, as he says, "to match high tech and high touch."

The tech part might still need a little work. As with all forms of electronic commerce on the Internet, online trading is susceptible to breaches in security. Combine that with old-fashioned stock market fraud, and there are some significant safety issues for the unsophisticated investor.

This concern goes both ways. A company that sells its shares directly to buyers on the Internet, for example, must make sure that the people placing electronic orders on the other end are really who they say they are.

"I think the universe of people who can be huckstered is much larger," said Tom Skornia, a Silicon Valley attorney who advises companies on commercial Internet issues. "If you're running a bucket shop in Century City, people know who you are; they can see you. Things are a whole lot different on the Net."

And if a broker says there is no charge for a transaction, don't be so sure. Some dealers known as "rogue traders" make their money by buying stocks and then reselling them to clients at higher prices without their knowledge. This practice is made easier by electronic transactions, which often move too fast for ordinary investors to keep up with.

"It's a matter of disclosure. A lot of times people are in the dark about it," said one source at a major brokerage house who requested anonymity. "Some clients still think they can get something for free--they can't. It's a business, after all."

Fearing that this practice may increase with the new interest in online trading, the National Association of Securities Dealers recently announced proposals aimed at stopping it. The self-regulatory trade organization, which operates the NASDAQ Stock Market, also plans to post background information on the Net about more than half a million brokers and investment firms to help investors avoid predatory dealers.

Asim Abdullah of the nonprofit CommerceNet sees yet another problem: the absence of any standard certification process. Without this, he says, there is no adequate way to determine the identity of legitimate parties involved in trading.

"It is similar to driver's licenses being issued by small companies down the street--they're all issuing them based on different criteria," said Abdullah, acting executive director of CommerceNet, a consortium of more than 140 companies that facilitates commercial growth of the Internet. "If you're a merchant and you use driver's licenses to validate checks, you're comfortable because they're certified by the DMV under a common set of policies. But what if there are no common guidelines? That's the big issue."

Despite such caveats, Abdullah and others are confident that such concerns will be resolved and that online trading will eventually flourish. And in retrospect, it may be no accident that the first company to make it happen was a brewery.

After all, as Skornia said: "Both sides of the business have one thing in common--they're intoxicating."

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