Ruder Opposes Banning Stock Index Futures : Markets Need to Be Better Capitalized, SEC Chairman Tells Congressional Panel

The chairman of the Securities and Exchange Commission warned Congress on Wednesday that it would be unwise to ban trading in stock index futures, a practice that has been widely blamed as a key factor in the stock market crash two weeks ago.

In his first congressional testimony since the market plunged, David S. Ruder agreed that such trading on the commodity futures markets in Chicago contributed “to some degree” to Wall Street’s alarming volatility. But he said it would be better to “regulate those (markets) rather than force them to move (offshore) where they aren’t regulated.”

Ruder, who took over only three months ago as head of the agency that regulates the stock markets but not the futures markets, also admitted that it “would have been wiser” if he had not discussed publicly the possibility of a temporary trading halt on Oct. 19, when the Dow Jones industrial average fell a stunning 508 points.

Some traders have accused Ruder of contributing to the plunge on Black Monday by raising fears among investors that the stock markets might close and prevent them from selling their shares.

Ruder confirmed that “serious consideration” was given to halting trading temporarily on the New York Stock Exchange on Tuesday, Oct. 20, because heavy orders to sell strained the market’s systems almost to the breaking point.

Weathered Storm Well

The suggestion was “not introduced by us,” Ruder said, but by officials of the stock exchange, who ultimately decided that it was crucial to keep the markets open to maintain confidence among investors.

While generally arguing that more study is needed before drawing firm conclusions from October’s unprecedented market decline, the SEC chairman made it clear that he considers it his most important challenge to ensure that markets are better capitalized so that dealers and trading specialists can better bear the brunt of any future panic.

Ruder also said the securities industry as a whole has weathered the market storm remarkably well so far. “We still do not see any problems with the major securities firms,” he said.

Ruder’s testimony came before the Senate Banking Committee, which is looking for ways to prevent such abrupt stock market losses in the future.

Meanwhile, members of the Commodity Futures Trading Commission, which oversees trading in the market for stock index futures, told another congressional panel that the commission should continue to operate independently and not be merged into the SEC, as some critics have suggested.

Acting Chairman Kalo A. Hineman and the two other commission members urged a House Agriculture subcommittee to postpone any changes until regulators have had a chance to study the interaction between trading on the futures and stock markets.

“Let’s look at the data to give us answers on the performance of the futures markets,” Hineman said.

A merger between the SEC and the futures trading commission “would imply the CFTC somehow has failed its regulatory mandate,” said CFTC member William E. Seale. He argued that the futures market “continued to function and provide investors a means of hedging equity risks.”

The commission has been widely criticized for its loose regulation of the futures markets, which over the past few years have given investors a number of new ways to place bets on the future direction of the stock market by trading in futures and options based on such widely followed measures as the Standard & Poor’s index of 500 stocks.

But Ruder told the Senate committee that although the SEC does not have jurisdiction over futures trading, it will examine whether imposing greater margin requirements for such instruments--boosting the cash necessary to trade--would reduce volatility in the stock markets by trimming activity in the futures markets.

Lawmakers praised the performance of the SEC during the market crisis, but many Democrats generally argued that the market’s wild ride suggested that financial markets had been overtaken by a speculative frenzy and needed to be reined in.

“Rather than markets sending Congress a message” on the need to curb federal budget deficits, said Sen. Terry Sanford (D-N.C.), “Congress should send the market a message.”

Ruder acknowledged that some individuals were crowded out during the market panic because of the overburdening of the Wall Street trading system by the computer selling of big institutions.

“The small investor was not as easily able to make his transactions as was the large investor,” Ruder said. Many small traders, he said, depended on a computer system that could not execute trades as quickly as those accessible to major institutional traders.

Ruder said he doubts, as some lawmakers allege, that major brokerage houses engaged in widespread abuses of the market by trading for their own accounts to get better prices at the expense of their customers.

In its study, the SEC will look into further regulation of Wall Street’s complex market-making and settlement systems, which often fell into confusion and delay during the crash, Ruder said.

But on the whole, he said, the Wall Street trading system stood up under the immense burden of trading 600 million shares on both Oct. 19 and 20--more than double the previous record and well above the maximum 400-million level that it had been built to handle.

“We did not have a breakdown in the efficiency of the markets,” Ruder said. They continued to function, he noted, despite all the problems in finding enough buyers to match with sellers.

Separately, President Reagan met during the afternoon with his new Presidential Task Force on Market Mechanisms, chaired by Nicholas Brady of the investment house of Dillon, Read & Co.

Before the meeting, the White House announced these other members of the task force: James C. Cotting, chairman and chief executive of Navistar International Corp. of Chicago; Robert G. Kirby, chairman of Capital Guardian Trust Co. of Los Angeles; Howard M. Stein, chairman and chief executive of Dreyfus Corp. of New York, and John R. Opel, chairman of the executive committee of International Business Machines Corp. of Armonk, N.Y. The executive director will be Robert Glauber of the Harvard Business School.