U.S. regulators said Monday that they had found no evidence to support speculation that a few large firms manipulated a Chicago Board of Trade futures contract on Oct. 20 as part of a scheme to boost sagging stock prices.
The rebound in the CBOT's major market index maxi, or MMI, futures contract occurred when the biggest traders were selling rather than buying, the Commodity Futures Trading Commission's Division of Trading and Markets said in a 37-page report. The report said it "does not support a finding of price m,anipulation."
The agency attributed the rally in the futures index to "positive" market developments, including an announcement by the Federal Reserve Board that it would boost credit to banks and stock buyback programs announced by several big corporations.
Stock prices plunged a record 508 points on the Dow Jones industrial index Oct. 19 and continued falling the morning of Oct. 20.
Focus on 1 1/2 Hours
The CFTC launched an investigation of MMI trading after news reports that a midday rally on Oct. 20 might have been part of a price manipulation scheme.
The report focused on MMI trading between 11:00 a.m. and 12:30 p.m. CST, during which trading of stock index futures contracts on three other exchanges was temporarily closed because of chaos on stock exchange floors.
The unusually sharp rise in the price of the comparatively little-used contract prompted speculation that a handful of large institutional investors had induced a rally in the index by buying heavily while trading of other contracts was halted, hoping to push up slumping stock prices.
The MMI is based on 20 blue chip stocks, including 16 that are in the Dow Jones industrial index. The MMI is far less widely traded than Standard and Poor's 500-stock index at the Chicago Mercantile Exchange.
A large jump in the MMI would have helped stock prices by signaling to big investors using computers that they should take money out of futures and put it into stocks.
The CFTC said it sought to determine whether price manipulation was responsible for the 80-point rally in the MMI during that time.
The federal regulatory agency said there was no indication that firms tried to buy futures contracts substantially above the market price or made rapid purchases at increasingly higher prices.
The federal regulatory agency found:
- There was no indication that firms tried to buy futures contracts substantially above the market price or made rapid purchases at increasingly higher prices.
- There was more concentrated selling than buying by the most active participants.
- Two of the three largest buyers bought before the index's price advance, and the third largest buyer's transactions occurred almost entirely just after the high of the rally.
- Trading during the rally was dispersed among numerous traders and there was no evidence of trading in concert.
- Trading was dispersed among small transactions.
The index moved up, the report said, on "the presence of more positive cash market fundamentals," including the Fed's announcement at 8:54 a.m. EST that credit would be available to the banking system.
Other bullish news included announcements by Citicorp, Honeywell, USX and Allegis that they would buy back shares of their own stock, and the reopening near midday of some stocks at higher prices, the report said.
The frenzy of buying by institutional investors on the MMI occurred while stock index futures trading on the Chicago Mercantile Exchange, the New York Futures Exchange and the Kansas City Board of Trade was temporarily halted.
When the CME's Standard and Poor's 500-stock index futures contract reopened at 12:05 p.m. Chicago time, its price moved sharply upward, and its discount to the underlying basket of stocks narrowed substantially.
Acting CFTC Chairman Kalo Hineman said in an interview that the report, which traced in detail the trading of several unnamed firms, was "a very graphic example of the kind of work that our surveillance people do."
Accusations of Laxity
Some critics of the CFTC have accused the agency of applying lax regulatory standards to futures exchanges.
Hineman appeared to be countering that criticism with his strong support of the investigation.
Last Wednesday, a task force created by the New York Stock Exchange to look into the October stock collapse recommended that computerized program trading of stocks be curbed and that government oversight of stock futures trading be taken away from the CFTC and given to the Securities and Exchange Commission. The SEC oversees stock markets.