Ruder, Phelan Say NYSE Specialists Undercapitalized

Times Staff Writer

David S. Ruder and John J. Phelan have different solutions. But both the chairman of the Securities and Exchange Commission and the chairman of the New York Stock Exchange agreed here Wednesday that October’s market crash exposed critical problems of capital inadequacy among stock exchange floor specialists and both urged them to find ways to raise capital.

“Clearly, the pressure is on to raise capital,” Phelan said.

Addressing a somber gathering of securities industry executives, NYSE Chairman Phelan said a number of non-financial companies already have inquired about forming various business arrangements with undercapitalized specialists--the pivotal stock exchange traffic cops who must buy stock when there are no other buyers.

Phelan also predicted that more large brokerages will acquire or form joint ventures with specialists, an approach that he said Big Board members prefer to SEC Chairman Ruder’s suggestion for the formation of capital pools.


Ruder suggested Wednesday that Big Board members create a capital pool to bail out stock exchange specialists during times of market turbulence. During the week of the Oct. 19 crash, specialists were hard hit and some were forced to seek financial assistance from others.

But Phelan called the plan one that “most (NYSE) member firms don’t like because they don’t want to provide funds for someone else.”

Stepping Up Hiring

But not all was downbeat in this Florida resort town Wednesday. While Phelan, Ruder and other speakers were preaching restraint, discipline and cooperation, it was clear that Wall Street’s legendary competitive fires didn’t die last month.


“We think this is a period of great opportunity,” said John W. Bachmann, managing principal of the St. Louis investment firm Edward D. Jones & Co. and chairman of the Securities Industry Assn. While much of the securities industry is going through a painful retrenchment, he said his firm is stepping up its hiring in the aftermath of the crash--from 40 to 45 employees per month to 65 to 70.

Similarly, the cash rich New York investment firm Drexel Burnham Lambert said it is on the verge of branching into three new areas--most notably forming a joint venture with the Big Board specialist Pforzheimer. That follows closely on the heels of Merrill Lynch’s acquisition of the NYSE specialist firm A. B. Tompane.

Although the numerous investigations of the Oct. 19 crash--when the Dow Jones industrial average plunged a record 508 points--are at least a month from completion, Phelan said he has yet to see anything surprising emerge from the reviews, and Ruder told reporters at a press conference before his speech that there is no indication yet that the financial markets were manipulated. There have been some suggestions that several major investment firms manipulated a little-used futures index to stimulate stock purchases on Oct. 20.

Addressing questions about his decision to let full-fledged program trading return to the stock market after a temporary ban, Phelan denied accusations that his was a response to threatened lawsuits.


“I can assure you that nobody strong-armed us,” Phelan said. “We restored it because there has been no long-term judgment about program trading, and we wanted to get the markets as close to normal as we possibly could . . . to allow analysis of its impact.”

He acknowledged, however, that his action was highly unpopular with the public. “We had more mail on this than on anything else,” Phelan said. “We were deluged. People are very nervous about it.”

Phelan also disclosed that Monday, when the market gave many nervous traders a start by plunging 110 points before rallying slightly, program trades accounted for a huge 41% of all electronic trades on the Big Board between 1:30 and 2 p.m. EST. Programs normally account for about 15% of NYSE volume and were responsible for only 13% of the trading on Oct. 19.

To help the Big Board gear up so it can routinely handle volume of 600 million shares a day--which it barely managed to do the week of Oct. 19--Phelan said he has formed an industry advisory committee.