Index Futures Did Not Cause Crash, Panel Says

Stock index futures trading at the Chicago Mercantile Exchange was not responsible for the Oct. 19 stock market crash, a panel of economists said in a report issued Tuesday.

The panel, appointed by the Merc, decided not to recommend any changes in trading procedures but said it may consider proposals in the next several months as other investigations of the Black Monday crash come to a close.

“Contrary to what you may have heard, the crash did not originate in Chicago, and it did not go from Chicago to New York,” said Prof. Merton Miller, an economist at the University of Chicago and chairman of the panel.

“There was a selling wave that hit both markets simultaneously,” he said. “If everybody decides to sell at the same time, then the markets take on some of the characteristics of a bank run.”

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Other panel members included economics professors Myron S. Scholes of Stanford University and Burton Malkiel of Yale University, and Washington lawyer John D. Hawke Jr., former general counsel to the Federal Reserve Board.

At a news conference, Miller said the group studied whether the futures markets in Chicago, particularly Standard & Poor’s 500-stock index futures, had caused or accelerated the stock market collapse, when the Dow Jones industrial index plunged a record 508 points.

“Our concern was not to decide how to fix it, but first to establish whether it was broke,” Miller said.

The panel concluded that the futures markets weren’t broken and--at least at this point--does not need to be fixed, he said.

“The futures market was not the leading factor in either the downturn or the turnaround (in the stock market),” Miller said.

No Ban Planned

Leo Melamed, the exchange’s special counsel, has said the Merc plans to propose changes in its trading procedures, such as permanent limits on daily price swings in the stock index futures market. But Miller said the panel decided not to recommend such limits.

He said the group also decided against banning portfolio insurance selling and arbitrage program trading--two trading techniques that some critics have contended were partly responsible for the market collapse.

“These are sensitive and complex markets,” Hawke said, “and slight tinkering can have a dramatic effect on the way the markets operate.”

The panel’s report comes as congressional and White House panels are investigating the role of stock index futures in the Black Monday stock market collapse.

The Merc adopted temporary price limits on its Standard & Poor’s 500-index futures market on Oct. 22 to decrease the violent price swings after the market disaster.

The limits halt trading when the futures contract price moves up or down 30 points in a single day.

In the days after the market collapse, futures markets came under criticism from some who contended that they exaggerate volatility.

But some institutional traders who are heavy users of Chicago’s futures markets oppose permanent price limits.

“Price limits create bad hedges,” said Fred L. A. Grauer, chairman of Wells Fargo Investment Advisers.

Grauer contends that if futures prices reached their limits, trading in them would be halted.

“The futures markets are supposed to hedge risks,” added Philip Johnson, former head of the Commodity Futures Trading Commission. “I’ve never quite understood how they’re supposed to perform that function if they can’t track the movements in the stock market.”