Thursday, January 29, 1998

Online trading can blind your sensibility

By Dan Gillmor / Knight-Ridder Newspapers

Cries of anguish filled the airwaves, news columns and online forums earlier this fall when the stock market took a one-day, 550-point tumble. Woe is us, wailed the buyers and sellers -- mostly sellers -- who had trouble connecting with their online brokers or, when they did connect, couldn't be sure if their trades had actually gone through.

It's beyond me why any rational customer would have expected smooth Web connections in the middle of a market panic. This is like expecting to drive 65 mph on a Silicon Valley freeway during rush hour.

Unlike the highway system, approaching its near-term physical limits in handling traffic, the Net's capacity keeps expanding. So when the online brokers accompanied their excuses and mea culpas with promises to do better in the future, they might well have been telling the truth.

Is this just one more occasion to praise technology's role in transforming yet another industry? After all, cyberspace has already made the flow of financial information more democratic, or at least diffuse. And it certainly has given small investors a way to pay lower commissions when they buy and sell stock. All are verifiably positive trends.

Why, then, am I still uneasy about all this? Because I'm not convinced that Internet Time -- the technology-spurred acceleration of our lives -- is an unalloyed blessing for small investors. Even if today's pace doesn't actually require a short-term view, it removes some of the traditional impediments that in the past almost forced us, sometimes unwillingly, to look before we leaped. That's an alarming course in a culture that honors wealth and celebrity, however attained, but downgrades honor.

Some online stock traders, no doubt, have done more than due diligence. Others may be shooting before they really aim.

Consider a radio advertisement one of the online brokers ran after the October debacle. One of the "real-life" characters in the ad seemed upset that some coveted stock had gone up and up and up in the short time that she couldn't make a connection with her Web-based broker.

The ad's basic message, as I understood it, was that this broker wasn't going to keep anyone waiting for a trade the next time the market melts down. That's possible, I suppose, though I wouldn't bet my house on it.

The other messages were more subliminal, and probably unintentional.

For one thing, the ad exemplified the casino-like nature of today's stock market. Share prices ricochet all over the place, notably in the technology industry but increasingly in other businesses, too. Stories, not fundamentals, are the guiding influences.

Let's distinguish between two kinds of people who play the market. First, there are investors, who buy shares and hold them. If they buy companies in volatile industries, they ignore short-term fluctuations. What matters are long-term gains -- and relatively untroubled sleep at night in the meantime.

Then there are traders, who go into individual stocks for the short-term, buying and selling rapidly. They try to make money on momentum, on the volatility as much as the fundamentals. With few exceptions, this is a game best played by people who do it for a living, who buy and sell in large quantities and take small margins on big trades.

Small-fry traders -- they are nothing but gamblers in my book -- will always be at a disadvantage to the big guys when it comes to the timeliness of information and trades. They will always run behind the insider bulls and bears, whether they trade online or with an old-line broker.

You can log onto an online service and find out, for example, how Wall Street analysts are rating the companies they follow. You can read their official estimates of companies' sales and earnings. But you, a small investor, won't be told the "whisper" estimates -- the unofficial numbers that Wall Street traders really follow in the days just before a company announces its results. Unless you're a big client, you'll miss the timely heads-up when an analyst downgrades a stock; you'll find out after the institutions and other huge investors have made their moves.

For patient, long-term investors who do their own research, online trading makes a great deal of sense. It can save money on commissions and other fees. The process is quite convenient. And if you don't worry about quick ups and downs in share prices, you don't have to worry about not getting through on the busy days.

My unease with short-term, quick-score thinking by small investors applies online or offline. But online, it seems to me, compounds the risk for such people.

Maybe the trends are running against human brokers, and toward machine-greased transactions of all kinds. But sometimes you do get what you pay for.

A good broker or other financial adviser earns money by offering good advice. That may consist merely of asking the client whether he or she really, truly wants to sell those shares in the middle of a panic, or buy a company just because the herd is buying.

Wall Street has its "circuit breakers" -- halts in trading when the market plunges more than a certain amount in a day. In this era of Internet Time, wise people will create internal circuit breakers, too.

(Join an online issues discussion by clicking on "Forum" on Dan's Web page (http:www.mercurycenter.com-columnists-gillmor ). Or write Dan at the San Jose Mercury News, 750 Ridder Park Drive, San Jose, Calif. 95190; e-mail: dgillmor(at)sjmercury.com; phone (408) 920-5016; fax (408) 920-5917.)