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When online trading systems crash, who pays?

NEW YORK (AP) -- The question of who -- if anyone -- is liable when electronic trading networks break down has resurfaced with a series of outages this week at Charles Schwab Group. "Liability for failure of electronic services is an area of increasing importance as more and more commerce is conducted over the Internet," says David Leebron, dean of the Columbia University Law School. That said, Leebron and other legal experts predict that investors will face difficult challenges in trying to prove not only that they lost money as a direct result of a computer crash, but also that their online brokerage was somehow negligent. There's no case law to turn to because online trading is so young. "We're treading on new ground," says Ivo Caytas, a securities lawyer in New York. ETrade Group Inc. was hit with two class-action lawsuits in February after software problems caused its computers to shut down on three occasions. Those cases are far from being resolved. Schwab -- the e-brokerage industry leader with 2.2 million online customers -- experienced problems that shut down its trading network last February, and has not yet been targeted by lawsuit. But it suffered three outages this past week: a 21/2-hour system crash Wednesday, a 50-minute outage Thursday and a failure Friday that lasted nearly eight hours. Any case against an online brokerage would be hard to win, experts argue, because before opening online trading accounts investors sign disclaimers that acknowledge the risks of Internet investing. "By signing the disclaimer, you're acknowledging that online systems aren't guaranteed 100 per cent of the time and that breakdowns and problems may occur," says Frank Lallos, a senior analyst at Gomez Advisors, a Massachusetts Internet research firm. That means a case against an online brokerage firm would have to prove the company was negligent in some fashion not covered in the disclaimer. Evidence that a firm failed to maintain a proper backup system or otherwise knowingly cut important corners might be grounds for damages, according to Caytas. But taking on a firm like Charles Schwab would be a lengthy and expensive battle. "As a lawyer, you'd be fighting a major institution at every step," Caytas says. "You don't do that for a single client unless the amount is huge." So the only cost-effective action would be through a class-action lawsuit involving possibly hundreds of people claiming damages. A class-action lawsuit raises its own problems, however, said Columbia's Leebron. Once a disclaimer is signed, an investor seeking damages would have to make a very specific case to prove a loss due to negligence. The more specific the complaint, the less likely the case can be applied to enough people to justify a class action. Finally, a large discount brokerage such as Schwab offers alternatives to investors who lose their online connections. Schwab customers had the option of dealing by telephone -- or going in person to the nearest branch office.

-- Homer Beanfang (Bats@inbellfry.com), October 25, 1999

Answers

Regardless of whether these systems can provide you with access to markets it is the markets themselves which should be of concern. I do not care if every brokerage and bank in the world is compliant. If the economy disintegrates because of a confluence of problems not the least of which is oil supply, then my friends we will indeed be in the soup. A bank is only as good as its outstanding loans portfolio and a market only as good as the next willing buyer. When these things go bad then all the compliance of banks and brokerages will mean nothing us.

And of course the greater the number of banks and brokerages which are affected the greater the panic will be as a multiplier of the panic that will already exist because of failing banks and markets.

Long bond 6.4% and rising, up 50 basis points from the Friday close. If you don't understand what that means then you might not know enough to be concerned about it. IE - precursor to derivatives market failure ($80 TRILLION exposure world wide).

-- ..- (dit@dot.dash), October 25, 1999.

The customer pays - it's in the contract. I think a lot of these "on- line traders" are cry babies. They shouldn't be trading if they don't know how to read and understand their brokerage contract. BTW, I'm not an on-line trader, but I have traded commodities (both day and position trading) for about five years - not an expert yet by any means, but long enough to experience my share of technical problems, bad fills, out-trades, and various other behind the scenes, death by a thousand cuts kind of screwings that are just part and parcel of the business of trading. You have to learn about the risks and then make contingencies.

If you trade at all (either on-line or via the telephone), YOU are responsible for contingency plans. There are many things that can happen. For example, your phones could go out, or the phones could go out in your broker's area. Computers can malfunction at either end, ISP's could go out, etc.

Some suggestions:

-Open a second account with another broker. If you have a problem with your primary broker and need to get out of a trade, you can hedge with your backup account until things get straightened out.

-Have a cellular phone and try to get a cell number from your broker. If regular phone service goes out on either end, you have an alternative.

-Write down all important brokerage account numbers and telephone numbers on paper. The batteries in your phone WILL go dead the day before your broker's trading network crashes, causing you to lose all the speed dial settings and leaving you desperatly searching through old piles of account forms and notes for the telephone number of the trading desk so you can get the heck out of your trade (of course you'll still wait on hold for ten minutes after finally finding the number if you're trying to trade stocks - but I digress).

Anyway, the point is: You're still responsible even if their system crashes. Trading is a business, so have contingencies if you're going to trade.

-- Clyde (clydeblalock@hotmail.com), October 25, 1999.