Online Trading Facts

Online trading is not always instantaneous
Investors may find that technological "choke points" can slow or prevent their orders from reaching an online firm.

For example, problems can occur where:
  • an investor's modem, computer, or Internet Service Provider is slow or faulty;
  • a broker-dealer has inadequate hardware or its Internet Service Provider is slow or delayed; or
  • traffic on the Internet is heavy, slowing down overall usage.
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A capacity problem or limitation at any of these choke points can cause a delay or failure in an investor's attempt to access an online firm's automated trading system.

Know your options for placing a trade if you are unable to access your account online
Most online trading firms offer alternatives for placing trades. These alternatives may include touch-tone telephone trades, faxing your order, or doing it the low-tech way--talking to a broker over the phone. Make sure you know whether using these different options may increase your costs. And remember, if you experience delays getting online, you may experience similar delays when you turn to one of these alternatives.

If you place an order, don't assume it didn't go through
Some investors have mistakenly assumed that their orders have not been executed and place another order. They end up either owning twice as much stock as they could afford or wanted, or with sell orders, selling stock they do not own. Talk with your firm about how you should handle a situation where you are unsure if your original order was executed.

If you cancel an order, make sure the cancellation worked before placing another trade
When you cancel an online trade, it is important to make sure that your original transaction was not executed. Although you may receive an electronic receipt for the cancellation, don't assume that that means the trade was canceled. Orders can only be canceled if they have not been executed. Ask your firm about how you should check to see if a cancellation order actually worked.

If you purchase a security in a cash account, you must pay for it before you can sell it
In a cash account, you must pay for the purchase of a stock before you sell it. If you buy and sell a stock before paying for it, you are freeriding, which violates the credit extension provisions of the Federal Reserve Board. If you freeride, your broker must "freeze" your account for 90 days. You can still trade during the freeze, but you must fully pay for any purchase on the date you trade while the freeze is in effect.

You can avoid the freeze if you fully pay for the stock within five days from the date of the purchase with funds that do not come from the sale of the stock. You can always ask your broker for an extension or waiver, but you may not get it.

If you trade on margin, your broker can sell your securities without giving you a margin call
Now is the time to reread your margin agreement and pay attention to the fine print. If your account has fallen below the firm's maintenance margin requirement, your broker has the legal right to sell your securities at any time without consulting you first.

Some investors have been rudely surprised that "margin calls" are a courtesy, not a requirement. Brokers are not required to make margin calls to their customers.

Even when your broker offers you time to put more cash or securities into your account to meet a margin call, the broker can act without waiting for you to meet the call. In a rapidly declining market your broker can sell your entire margin account at a substantial loss to you, because the securities in the account have declined in value.

No regulations require a trade to be executed within a certain time
There are no Securities and Exchange Commission regulations that require a trade to be executed within a set period of time. But if firms advertise their speed of execution, they must not exaggerate or fail to tell investors about the possibility of significant delays.

What To Do If You Have a Complaint
Act promptly. By law, you only have a limited time to take legal action. Follow these steps to solve your problem:

  1. Talk to your broker or online firm and ask for an explanation. Take notes of the answers you receive.
  2. If you are dissatisfied with the response and believe that you have been treated unfairly, ask to talk with the broker's branch manager. In the case of an online firm, go directly to step number three.
  3. If your are still dissatisfied, write to the compliance department at the firm's main office. Explain your problem clearly, and tell the firm how you want it resolved. Ask the compliance office to respond to you in writing within 30 days.
  4. If you're still dissatisfied, then send a letter of complaint to the National Association of Securities Dealers, your state securities administrator, or to the Office of Investor Education and Assistance at the SEC along with copies of the letters you've sent already to the firm.