WASHINGTON -- Online brokerage firms need to improve customer access through the Internet during periods of stock market turmoil, the Securities and Exchange Commission said in a review of the October 1997 stock market slump.
The SEC's mention of online brokerages was one of the regulator's few criticisms of market systems during the sharp decline. While some small problems developed in stock and option quotation systems and the Nasdaq, the commission said "it found no indications of the types of large-scale breakdowns in automated trading systems that had overwhelmed the markets of 1987."
On 27 October 1997, the US stock market experienced its largest one-day fall in a decade with the Dow Jones Industrial Average dropping 554.26 points or 7.2 percent to close at 7161.15. The one-day selloff represented the largest point decline ever and the 10th largest percentage decline in the index since 1915, the commission said in its report.
The next day, 28 October, the market resumed its decline before rallying on record volume that challenged the ability of broker-dealers to execute orders. On that day, the SEC said, online broker-dealer customers failed to gain timely access to their accounts, although some of the delays experienced reflected limitations of the Internet itself.
Overall traffic was extremely heavy that day, and problems with regional ISPs meant that investors in some areas of the country experienced greater delays, the agency said. However, the SEC said Internet broker-dealers "might consider" boosting internal capacity so their operations keep going during surges in volume.
Online firms should also consider prioritizing customer access at peak times, including limiting some general price inquiries, in order to execute customer orders and provide them with alternatives when Net access slows or becomes unavailable, the agency said. They should also use every "reasonable effort" to notify customers about operational difficulties, it said.
The online brokerages appeared to perform better through the stock market's more recent hiccup, with independent analysts citing only modest delays as the Dow gyrated wildly during the first week of this month.
Copyright © 1998 Reuters Limited.
