Users should also remember that there is a trade-off involved in all the services offered by their online investment websites. Surely, the processes of analysing different stocks, placing orders to buy/sell them, electronically transferring money to the relevant investment account, etc become faster, cheaper and more easy to use, are all advantageous to the user. But they all have their flip-sides, and online trading and investing spawns an array of issues that have not yet been solved. The following passage lists some of these issues.
“the introducing broker needs to worry about building or customizing a clean interface and supporting it. The futures commission merchant needs to run a secure network with proper risk controls. The exchange needs to operate a scalable trade-matching engine or ensure that floor technology adequately supports executing pit brokers or both. But several new problems are the actual trader’s alone because the other parties in the trading game lack the ability, desire or business rationale to lend a helping hand. Most of these issues contribute to complicating your trading day – and never seemed to get in the way before you moved your account online.” (Holter, 2001)
Investors should also be aware of scammers and fraudsters lurking in the Internet and take necessary precautions in safeguarding their investments. The proliferation of junk mail, ponzi investment schemes and misleading advertisements are all harmful to the interests of online investors. The worrying aspect of these threats is that they are not perpetrated by proven criminals, but are carried out in collusion with accountants, lawyers and even stockbrokers. Indeed, most of the investment scams are executed by a team of white-collar criminals, as the recent expose of the Madoff Scandal illustrates. The investment scandal perpetrated by Bernard Madoff is the largest financial fraud in the history of capitalism. It is believed that Madoff’s secretive investment advice firm caused a loss of nearly $65 billions for the 4,000 odd investors who trusted his firm with their wealth. (Murray, 2000) The investors consisted of several celebrities as well as people from middle and lower classes, thereby making the loss more acute for the latter group. Although the Bernard Madoff’s investment firm was registered and operated in the United States, the lessons learnt from this episode is equally applicable to retain investors here in the UK. Typically, those initiating such ponzi schemes lure unsuspecting customer through
“well-written e-mails, online newsletters and bulletin boards, and flashy Web sites–complete with audio, video, and links to legitimate sites–to perpetuate their schemes. These guys no longer need a boiler room with 100 people phoning during the dinner hour, they can send thousands of e-mails with a single keystroke. They can also post anything on the Internet–cheaply quickly, and without disclosing their identity and location. That means it’s up to you to separate truth from fiction” (Murray, 2000).
Instances of a particular type of financial crime called “insider fraud” have also escalated during the age of the Internet. The improvement in telecommunication technology, which has helped businesses in unprecedented ways, has also incidentally facilitated fraudsters. According to industry analysts, two thirds of all losses arise due to this kind of fraudulent activity within the confines of the organization. As much as 6% of the annual revenue of a business organization can be lost in this manner. As was rightly pointed out by a report, this kind of electronic financial transaction fraud is perpetrated by technology-savvy employees, who have a thorough understanding of the financial processes, business system customizations and network technology. Recently laid-off employees, subcontractors and third-party consultants also commit such frauds. In such cases, the enemy is clearly within and not without. So who gains access to vital computer systems will have a bearing on the overall security of business operations. (Koreto, 2004)