Massive fraud, 'free' trades roil online stock brokerage

The FBI, the SEC and the NASD are investigating losses at TD Ameritrade and ETrade stemming from “one of the biggest cases of identity theft to strike the U.S.

The FBI, the SEC and the NASD are investigating losses at TD Ameritrade and ETrade stemming from “one of the biggest cases of identity theft to strike the U.S. securities industry,” online infiltration of customer accounts by computer hackers in Eastern Europe and Asia, according to Bloomberg reports:

In one "pump-and-dump'' scheme…thieves used customers' money to drive up the prices of little-traded stocks and then sold shares they bought earlier at a profit.

TD Ameritrade has reimbursed victimized customers about $4 million last quarter and ETrade suffered losses of about $18 million, according to Bloomberg reports.

Separately, online brokerage fees are facing downward pressure; Bank of America recently instituted a no-fee online trading option for high net-worth customers and new, online discount brokers are emerging, such as TradeKing.

I recently interviewed the Founder and CEO of start-up TradeKing, Donato Montanaro, (see “TradeKing CEO talks ‘The Real Deal’: Web 2.0 meets online trading, exclusive interview”).

TradeKing touts its $4.95 per trade fee, “We don't have a pricing structure, we have a price.” Montanaro told me:

A strong value message and low price point will help TradeKing to very efficiently draw customers from the open marketplace…TradeKing has found a way to offer the lowest commissions in the industry, while still maintaining a healthy operating margin, a testament to our ability to manage technology, marketing and clearing expenses while maintaining revenue growth.

Montanaro is one of the true electronic brokerage pioneers. He worked in the nascent industry back in 1992 when, he recalls, “online trading meant connecting to a broker through CompuServe with a 1200-baud dial-up modem.”

TradeKing’s online competitors also are managed by industry pros, everyone and every company is challenged by competitive and risk dynamics.

Bloomberg cites ETrade Chief Operating Officer, Jarrett Lilien:

The perpetrators were more organized, and it was a bigger issue this quarter than it had ever been before. 'It wasn't just hitting one company, it was hitting everybody,' he said.

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