E*Trade Gets More Attention Than It Bargained For

E*Trade (EGRP) is finding that the costs of calling itself a technology leader might outweigh the gains.

For the second consecutive day Thursday, E*Trade suffered from technology problems that made online trading impossible for some customers. Yet plenty of online brokers have had technology problems that often receive little notice. But E*Trade's poor performance has been scrutinized from all angles.

There are several possible explanations for why the No. 3 online broker finds itself at the center of this maelstrom. Its problems come after a month of industry-wide online trading difficulties stemming from heavy volume and fast-moving stocks. E*Trade also puts itself in the spotlight because of its extremely aggressive marketing. Finally, the company has made a big deal of its technology platform and innovation.

And as the New York Attorney General starts an inquiry into online brokers because of complaints, E*Trade risks becoming the poster child of online trading problems.

"They're dealing with the more pesky side of the attention they've brought upon themselves," says Larry Kamer, chairman of GCI Kamer Singer, a San Francisco public relations firm that specializes in crisis communications. "When you position yourself in a leadership category, especially in technology, especially on the Internet, then if you stumble, there's a lot of attention, because companies like E*Trade are seen as a metaphor for the entire industry."

Thursday, E*Trade continued to suffer online trading difficulties as a result of a software change Tuesday night. In emails to TheStreet.com Thursday morning, customers complained of the inability to trade online, long waits on the phone and the inability to access account information.

After the close Thursday, E*Trade spokeswoman Lisa Nash said at about 10 a.m. EST the broker started to notice a problem. Up to half of E*Trade's trading customers could have found their online trading access blocked and some may have had trouble accessing account information, Nash said. Starting between 12:30 and 12:45, the system began functioning normally. E*Trade did a systems audit Wednesday night and thought it had fixed the problem, but the Tuesday change had an unexpected impact after trading started Thursday.

Wednesday, E*Trade also suffered from the software problem, blocking all customers from trading online for over an hour and some customers the entire day.

Some observers say E*Trade may have set itself up for the harsher criticism that largely has eluded other brokers when they've had trading trouble. E*Trade has aggressively touted its stateless technology architecture, which was designed to bypass areas of the system that don't work, at one point saying that it should abolish systems failures.

E*Trade agrees that the promotion of its technology has increased scrutiny of this week's problems. "People look to E*Trade," says E*Trade spokeswoman Lisa Nash. "We're really public about what we're trying to do in terms of product innovation and technology leadership. We set ourselves some pretty big stakes."

E*Trade also made the mistake Wednesday of saying on CNBC that the problem was fixed when some customers still were unable to trade.

"If you are going to make a statement that something is fixed, you've got to make damn sure that it is because that's your credibility," says Joe Epley, chairman and chief executive of Epley Associates, a North Carolina public relations firm that deals with crisis communication. "You can brag about what you're going to do, but performance is proof of pudding. People can be understanding to a point but they're not understanding of false promises."

Of course, the industry in general promotes its fast and easy trading, luring customers with glitzy ads that talk of trades executed in seconds. And other brokers in the industry continue to suffer technology problems, more recently related to heavy volume but also related to periodic glitches often stemming from system changes or outside factors.

"Everyone has technology problems," says online broker analyst Michael Chung at Williams Capital.

Thursday afternoon Automatic Data Processing (AUD), a provider of back-office services for many brokers, suffered a problem with its mainframe. The problem knocked out online trading at some online brokers, according to three brokers whose online trading went down for about 30 to 60 minutes as a result. ADP didn't return a call.

Donaldson Lufkin & Jenrette (DLJ) unit DLJdirect, the No. 7 online broker, experienced problems Monday that slowed service and may have prevented some customers from trading online for about an hour, according to the company. And Charles Schwab (SCH), the No. 1 online broker, and Toronto Dominion Bank (TD) unit Waterhouse, the No. 2 broker, suffered online trading problems in December.

The inquiry launched Thursday by the New York Attorney General Eliot Spitzer shows the industry's problems finally may be getting the attention some customers think they deserve. In a press release, Spitzer said: "The public knows that there are always risks involved in investing in the stock market. But part of that risk should not include questions about whether trades will be executed promptly or whether online brokerage firms can deliver on the services that they've promised."

The statement was in contrast to a recent comment from Securities and Exchange Commission Chairman Arthur Levitt, who said: "[Y]ou may have trouble getting online or receiving timely confirmations of trade executions. You should not always expect 'instantaneous' execution and reporting. There can and will be delays in electronic systems."

Spitzer alluded to E*Trade's problems this week without mentioning the firm by name and said he was asking for reports from several online brokers based on the complaints about technology and execution delays. In addition, four Democratic congressman reportedly sent a letter to Levitt Thursday citing capacity and technology concerns and requesting a briefing from regulators on the issues.

Spitzer said he is looking to develop ways to protect investors as the ranks of online traders grow. "If these firms can't handle the volume of trades right now, what can we expect with more and more online trades taking place this year if there's another market correction similar to the one we had last August?" Spitzer asked.

As for winning customer faith in online trading, Kamer at GCI Kamer Singer says E*Trade not only has to fix the problem but be very public about the steps it is taking. That goes for the online brokers in general, he says, since online investors are an especially skeptical lot.

They may be tolerant of the odd tech glitch, but not by a broker that downplays technology problems.

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