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How Safe Is Online Investing?

It started just four years ago. Now, more than 4 million people let their fingers do the investing, lured by the speed, convenience and average $15 commissions of online stock trading.

But some experts and lawmakers are concerned about the lack of personal financial advice, growing investment fraud on the Internet and potential invasions of privacy.

Cyber investing is booming. Industry analysts are forecasting a six-fold increase in online brokerage accounts in the next five years. The nation's biggest online trading firm, Charles Schwab & Co.'s E-Schwab, says it handles some 60,000 electronic trades a day.

"Online investing ... has brought about a new era in the financial markets," Rep. Michael Oxley, R-Ohio, said Thursday at a hearing of his House Commerce subcommittee on finance. "As a result of competition in the online market, brokerage commissions have decreased more dramatically than at any time ... since the deregulation of commissions in the 1970s."

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Oxley said the surge raises important policy questions for Congress and the regulators.

Among the issues: federal regulation of so-called alternative trading systems, possible new taxes on Internet transactions and the proposed doubling of charges by the traditional stock exchanges for providing real-time market data.

Julio Gomez, a consultant who testified at the hearing, called online investing the most popular product ever introduced in the history of financial services, surpassing even the growth rate of mutual funds. Brokers opening online accounts for customers can't keep up with demand, he said.

But while noting the benefits for average investors, Gomez also said the lack of personal financial advice online was "glaring."

"What investors are not finding (online) is personalized attention and assistance in making investment decisions," Gomez told the panel. He suggested that some big full-service brokerage firms such as Merrill Lynch and Smith Barney likely will move online in the next few years.

Some lawmakers noted the growing problem of investment fraud using the Internet, a problem that securities regulators have identified as among the most widespread frauds now ensnaring average investors. Common scams in this category include stock-price manipulation, illegal pyramid schemes, insider trading and acting as a broker or investment adviser without being properly licensed.

Joseph Fox, chairman of electronic Web Street Financial Group, recommended that the penalties for Internet fraud be tightened. He also urged closer scrutiny by regulators of online investment "chat rooms" linked to brokerage firms. The chat rooms "may be used for the purpose of hyping a particular stock, due to the anonymity of chat room participants," he said.

Rep. Edward Markey, D-Mass., questioned whether the popularity of online investing also could bring potential invasions of consumers' finanial privacy, including selling of personal financial data to other companies.

And Rep. Billy Tauzin, R-La., cited the possibility of computer hackers breaking into online trading systems.

"Obviously there is no perfectly secure system," he said.

Written By Marcy Gordon, AP Business Writer

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