A Tale of Two Markets and Two Sets of Protections

By Gretchen Morgenson N. Y. Times News Service | THE JOURNAL RECORD, February 23, 1999 | Go to article overview

A Tale of Two Markets and Two Sets of Protections


Gretchen Morgenson N. Y. Times News Service, THE JOURNAL RECORD


NEW YORK -- It has become fashionable for investors to think they no longer need brokers to help them with their investments. A computer, a modem and an online account, so the thinking goes, are all you need to make a fortune in stocks.

Never mind that a big part of an honest broker's job is keeping his or her customers away from investment mistakes, a task that not even the smartest machine can do.

The fact is, today's electronic access to stocks requires of online investors a heightened responsibility for their own actions. Few investors may yet realize just what this responsibility involves. Investors may not know, for example, that if their online trading firm is a member of the National Association of Securities Dealers and problems crop up in their accounts, they may be left holding the bag. Some 100 brokerage firms offer online trading services. Those that are members of the New York Stock Exchange abide by its rules; firms that belong to the NASD follow its regulations. A little-known but crucial difference between the two sets of rules leaves investors who use NASD brokers more vulnerable. The difference involves "suitability," a pillar of the securities laws. The New York Stock Exchange essentially requires its members to make sure that an investment is suited to a client's needs and circumstances before making the sale, even if the transaction was the investor's idea, not the broker's. By contrast, if a customer trading through an NASD firm buys a stock that has not been recommended by the broker, the firm is under no obligation to evaluate whether the investment is appropriate. …

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