Computer Trading Absolved by SEC : But Agency Says It Had an ‘Indirect Negative Effect’
The Securities and Exchange Commission today said that computerized trading strategies did not cause last October’s stock market plunge by themselves, but that they “had an indirect negative effect” on the market.
In a 900-page analysis of the Oct. 19 crash, the SEC reached many of the same conclusions that a presidential task force had produced a month ago. Unlike that panel, however, the SEC did not call for a new agency to oversee all financial markets.
The report did call for a study of increased margins, or down payments, for buying stock index futures and proposed the creation of a special trading station for the buying and selling of stock indexes. But the commission did not propose a specific margin requirement for index trades.
The SEC came out firmly against setting limits on how much stock prices may rise or fall on a given day, calling such a plan “somewhat self-defeating.”
The report was indirectly critical of computerized trading strategies involving the simultaneous buying and selling of stocks and stock index futures. The existence of such programs and their impact on stock prices tended to discourage many individuals and institutions from buying stocks themselves, the commission said.
Can Cause Fluctuations
Such computerized programs, which involve the Chicago futures market and New York stock exchanges, can cause wide, sudden fluctuations in stock prices based on perceptions of a stock’s worth at a future date.
The SEC did not condemn such strategies, but suggested changes in their regulation, including an end to the practice under which sales of stock index futures may begin earlier in the day than trading in the stock itself.
“Futures trading and trading strategies did not cause the market decline, but had an indirect negative effect,” the report said.
The SEC praised the Federal Reserve Board for pumping money into the nation’s financial system the morning after the crash so that banks could lend brokers money needed to cover their huge losses.
The infusion of cash into the system was “critical in avoiding any potential for . . . gridlock,” the report said.
Overall, the agency said that “changes in investor perception, institutional stock selling and program trading strategies combined to accelerate the market’s downward slide.”
Another Report Given
A report by another group, released today, said that “unprecedented change” in investor psychology, not the computerized trading strategies blamed by many analysts, was responsible for Wall Street’s Black Monday stock crash.
The final staff report by the Commodity Futures Trading Commission says so-called “program trading” strategies did not play a significant role in October’s market plunge.
“The bull market in stocks that started several years ago began to trend down in late August and the downward trend was accentuated in early October,” the report said. It said that trend was responsible for a major change in investor attitudes, a change that made the big price plunge of Oct. 19 possible.
