Online Trading Highlights the Pitfalls of E-Commerce

As Internet commerce has exploded, a number of vendors have recently experienced "hiccups," interruptions in e-commerce service or availability. These hiccups are always undesirable, but in the frenetic world of online trading, periods of downtime and unavailability can result in a first-class tickets to a probe by the Securities and Exchange Commission (SEC).

According to some estimates, online trades account for about one-third of small investor trading. Some analysts conservatively estimate that more than 5 million Americans trade online. At an early May presentation at the National Press Club in Washington, SEC chairman Arthur Levitt pegged the number even higher, suggesting up to 7 million Americans trade online.

But despite the growing popularity, or maybe because of it, online trading has had some difficulties. In early February, the Web site of online trading specialist E*Trade ( crashed three times over the course of three days, resulting in more than four hours of system downtime. In late February, online trading giant Charles Schwab ( experienced about an hour and a half of downtime in a single day, which the company blamed on a glitch in a mainframe that was being overhauled to increase its capacity. In both cases, investors who trade with these companies were unable to buy or sell stocks online during the downtime.

And when things seemed to be moving smoothly again, in late May trading firm Wit Capital ( acknowledged that its online stock trading system crashed for a period of 40 minutes in a single day. Wit Capital blamed the downtime on the coincidence of five Internet-related IPOs, which the company says swamped the computer systems at Kingland Cos. Ltd., which processes its orders.

Regulatory agencies have been quick to jump into the online trading fray. In early May, Charles Schwab acknowledged that it had been contacted by federal and state regulators as part of a nationwide probe into online trading. And in March, New York Attorney General Eliot Spitzer announced plans to create a bureau responsible for investigating Internet-related matters, including online trading.

The SEC’s Levitt has spoken out about the obligations of online trading firms to their investors. "First, firms need to ensure that their ability to provide effective customer service keeps pace with their growth," Levitt indicated in an early May speech, Plain Talk About On-Line Investing. If you’re marketing your firm to new customers, you’d better be able to provide them service when they do business with you. Firms are opening roughly 15,000 new accounts a day. That means 15,000 new potential complaints a day, especially if a system goes down."

But what is to be done? Many online trading firms have implemented transaction processing systems with maximum capacity reserves pegged at several times their average daily capacity. E*Trade, for example, uses its Stateless Architecture, which company officials say enables more than 150,000 customers to simultaneously place orders on its site. According to Paul Johnson, a senior research analyst with the Internet and e-commerce strategies program at International Data Corp. (IDC, while E*Trade was developing its Stateless Architecture, it selected technologies that would enable it to support up to four times as many simultaneous users within the next four years.

"E*Trade's technology strategy and investments while developing its Stateless Architecture were right on target," Johnson stated in IDC’s E*Trade: The Challenges of Managing a Complex E-Commerce Network bulletin. "The company has done everything that a young Internet powerhouse is supposed to do. The most frightening result for other e-commerce firms is that these investments may still not guarantee success," Johnson said.