Exchange Head Backs Panel’s Crash Analysis

As Wall Street braced for what may be another difficult week, the chairman of the New York Stock Exchange on Sunday endorsed a presidential study group’s conclusion that in effect blames the exchange’s best customers for the October stock market crash.

The exchange’s John J. Phelan Jr. said he agrees with the report’s view that 12 to 15 large institutional investors, by unloading billions of dollars worth of securities and futures within hours, were “basically responsible” for the collapse that wiped out $1 trillion in stock value.

“I hope those investors . . . have learned something about their responsibilities to the 180 million Americans who are invested, directly or indirectly, in the stock market,” Phelan said in his first such comments on the role of large investors in the crash.

Sell-Off Became Rout

The five-member Brady Commission concluded after 10 weeks of study that a few of the largest investors, such as pension funds and mutual-fund managers, used new computerized trading techniques that turned the Oct. 19 sell-off into a rout that dropped the Dow Jones industrial average 508 points. Dillon Read & Co. investment banker Nicholas F. Brady headed the presidential commission that examined the October collapse.

Phelan said he agrees with the commission’s view that there is a need for a single regulatory agency to oversee issues that span the U.S. financial markets. He said he sees the need for a review of rules concerning buying on credit, or margin, improved clearing procedures and a better market information system.

But Phelan did not endorse the panel’s recommendation that the exchanges or regulators put in place additional “circuit breakers”--such as temporary trading halts or daily limits on price swings--that would halt activity when the markets overheat.

Phelan said the markets already have provisions for temporary halts, including the Chicago commodity markets’ price-swing limits and the Big Board’s system that interrupts trading when there is a huge imbalance of orders to buy or sell stock.

“I think all of us today, in some way or other, are trying to put in some safety net,” said Phelan, who was interviewed on NBC’s “Meet The Press.”

Phelan’s general endorsement of the Brady Commission’s recommendations contrasted with the view of a key congressional committee chairman that the proposals do not go far enough. Rep. John D. Dingell (D-Mich.), chairman of the House Energy and Commerce Committee, said the commission’s report may be criticized as “too mild” because the market system already has “circuit breakers,” margin requirements and oversight agencies.

The report “doesn’t suggest anything that should scare anybody,” Dingell said. “What it does is offer rather mild palliatives for a situation which could be very bad.”

Inquiry Not Complete

Dingell said in an interview that although his committee has yet to complete its investigation of the crash, he believes there is a need for a closer look at raising margin rules, for further regulation and increasing capital requirements for market makers, the brokers who specialize in trading specific stocks. Legislators, he said, also should consider whether mandatory price-swing limits or other “circuit breakers” should be imposed.

“We’re operating under the same rules we had 50 years ago, and the financial world is a different place,” he said.

Meanwhile, as discussion of the report continued, officials of the largest two stock exchanges said they have taken no major precautions to ease the effects of another sharp fall in stock prices, should another major sell-off begin today. Friday’s trading dropped the Dow Jones industrial average 140.58 points, and raised concerns that investors plan to pump more sell orders into the system when exchanges open today.

Market’s Volatility

Richard Torrenzano, a vice president of the New York Stock Exchange, said in an interview that Big Board officials are not contemplating asking member firms to refrain from using the computerized order system that allows them to conduct the so-called program trading that some cite as a cause of the market’s volatility. The exchange asked for such a halt during the October crash to ease pressure on the system.

But Torrenzano said the exchange would consider making the request, and has other unspecified options if today’s trading session turns into a rout. “Nobody knows what’s going to happen, but if there’s another big sell-off, we’ll be able to handle it more efficiently than last time,” he said.

Torrenzano also asserted that the Big Board specialists, who are responsible for overseeing the trading in particular stocks, are as able as ever to withstand the effects of another sell-off, despite their losses in October. He said the specialists have the capital they are required to maintain under the rules of the exchange and the Securities and Exchange Commission.

‘Watching the Situation’

Arthur Levitt, chairman of the American Stock Exchange, said his organization also has not taken any special precautions to moderate the effects of a major sell-off. Levitt said his organization is “watching the situation,” though he said the market does not face the same situation it did in late October.

Stock prices are not nearly as high as they were then, nor are investors worried about a sharp rise in interest rates or possible tax law changes that would slow takeover activity, he said. Levitt said he agrees with the Brady Commission’s diagnosis of the stock market crash, although “it didn’t go far enough, because they didn’t have time. . . . There’s nothing terribly radical in there.”