Program Trades Will Likely Be Suspended, Say Industry Experts
Program trading by Wall Street firms, the computer-driven sale of massive blocks of stocks and securities futures, will be effectively suspended until the markets calm down, industry and political officials indicated Friday.
Reagan Administration officials are convinced that program trading, which is believed to exaggerate market movements, played an important role in Monday’s collapse of stock prices. And New York Stock Exchange Chairman John J. Phelan has been warning for more than a year about the volatility of the markets when these computer programs are used.
Officially, the stock exchange has said only that it will decide the issue of whether to permit program trading on a day-to-day basis. But privately, securities industry sources acknowledge that a plethora of investigations now ensure that large-scale program trading won’t be immediately acceptable again.
Instantaneous Transmission
Inquiries are under way by the stock exchange itself, the federal Securities and Exchange Commission, congressional committees and a special panel appointed by President Reagan. “The memories of this week will last for a long time, and we won’t see program trading for awhile,” said an industry source, who asked not to be identified.
Securities firms have obeyed the request by the New York Stock Exchange to keep their large-scale programmed trades out of the automated system that provides virtually instantaneous transmission of buy-and-sell orders.
Computer-programmed trading may involve an enormous number of stocks, bought and sold in breathtakingly rapid fashion, to take advantage of temporary differentials between the current stock price and the price of the futures index, a contract that estimates market activity in coming months.
Computerized program trading accounted for 20% of the exchange volume Oct. 16, and probably a smaller share of the record breaking volume Monday, said Phelan, the Big Board chairman. “All volatility cannot be attributed to program trading, but it is certainly a contributing factor,” he said earlier this week.
“We have been out on the trail for the better part of a year warning everybody and telling everybody . . . “ about the threat of increased volatility in the markets, Phelan said.
The removal of computerized trading means that “people are now locked out of a particular market strategy,” Steve Malinowski, vice president of E. F. Hutton, said in an interview Friday. “We’ve been doing no trading. We’re standing aside in terms of market volatility.” He thinks that the trading technique has been unfairly blamed for the nervousness of the markets.
“All the reasons why the market went down will be researched for days and weeks and months to come,” Malinowksi said. “People are running at a high emotional level. To say program trading is at fault is over simplistic.”
Robert E. Linton, chairman of the Drexel Burnham Lambert investment firm, said “nobody can prove the market would be five cents higher or lower” because of program trading. “We need to study the matter and see what is really involved. It is correct to call for a gathering of facts and not jump to a conclusion.”
However, Reagan Administration officials are so alarmed by the market’s violent swings this past week that they are highly skeptical of any quick resumption of program trading through the New York exchange’s computer system. The Monday market plunge may have been worsened by program trading, they fear. “I don’t think anyone anticipated the 500-point drop on Monday,” a senior White House official said Friday, discussing the extraordinary events.
On Monday, he said, White House Chief of Staff Howard H. Baker Jr. gave Reagan the first report on the tumbling stock prices at about 10:30 a.m. “It was clear what the trend was,” he said, and after that, Reagan was given hourly updates. Baker also consulted with his predecessor, Donald T. Regan, during the day, as well as with other former White House officials closely tied to Wall Street. Regan is a former chairman of Merrill Lynch.
By early Monday afternoon, Treasury Secretary James A. Baker III and Federal Reserve Board Chairman Alan S. Greenspan had been told to cut short their trips to Europe and return to Washington. By Monday evening, Greenspan was at work on the one-sentence announcement for Tuesday morning promising that the Fed would keep money supplies ample.
The fear and tension that pervaded the Administration when the market slumped has generated equally intense concern on Capitol Hill. Congressional investigators have been talking this week with investors, brokers and securities analysts about the impact of program trading, and detailed questionnaires will be prepared for various stock and futures exchanges, according to a spokesman for Rep. Edward Markey (D-Mass.), who will be conducting the stock market inquiry.
Times staff writer Eileen Quigley contributed to this story.
