Radical Guide to Investing: The 4 Criteria for Picking a Brokerage

This guide has moved, and is now The ETF Investment Guide at Seeking Alpha.com.

June 1, 2005 | Permalink

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There's an article on Financial Cryptography blog about someone who's Ameritrade account was sold out in 3 mins by phiskers with the money to be transferred to someone else's bank account.

http://www.financialcryptography.com/mt/archives/000515.html

The whole thing makes me nervous about the idea of having large sums of money in internet controlled accounts. Most internet financial firms seem to reach a point [like PayPal] where the dominant cost is controlling fraud. I suppose on-line brokerages are no different.

Obviously it doesn't change the cost argument, but perhaps large savings accounts could be better managed by being under tighter controls than a normal dealing account, e.g. a locked-down future version of Amerivest.

Posted by: Thomas Barker | Jul 7, 2005 5:21:29 PM

Re the phishing/fraud problem and the safety of online accounts, a couple of points: First, some banks/brokerages are introducing two-factor authentication (e.g., a password plus a hardware token of some sort), which is a little bit of an improvement. However it still doesn't protect against man-in-the-middle attacks where you go to a phishing site, authenticate to it using your token, and the site then authenticates itself to your bank/brokerage using your just-supplied credentials; see Bruce Schneier's article (http://www.schneier.com/essay-083.html) on these issues.

But really, it seems to me that an equally serious thing to worry about would be the ability of an attacker to impersonate an account holder when calling on the phone directly with a bank's or brokerage's customer service department, taking advantage of relatively loose authentication procedures. ("I forgot my password." "Oh that's OK, what's your social security number?") This could of course work equally well with a traditional (i.e., "non-Internet") bank or brokerage.

As you imply, I think the real solution is going to be instituting tighter controls on accounts, especially in terms of executing trades and making transactions in and out of accounts. This would seem to be entirely compatible with the style of investing advocated in this guide, since once you've set up your portfolio the number of subsequent trades is going to be relatively small, and account holders might be willing to accept a bit of inconvenience in exchange for enhanced peace of mind. (I certainly would be glad to make this tradeoff.)

Posted by: Frank Hecker | Jul 11, 2005 3:07:50 PM

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