Ruder Says SEC Should Be Main Stock Futures Trading Overseer
Securities and Exchange Commission Chairman David S. Ruder declared Wednesday that his own agency should play the dominant role in regulating the stock and futures markets to prevent wild swings such as the Oct. 19 plunge.
His testimony to the Senate Banking Committee heightened a dispute with the Commodity Futures Trading Commission, which regulates trading in stock futures. Acting CFTC Chairman Kalo A. Hineman later told the committee that while he approved of greater coordination between the SEC and the CFTC, “I do not see a need to grant broad intermarket power to a single agency.”
Simultaneous computerized trading of huge blocks of stocks in New York and stock futures in Chicago has been blamed for aggravating the Oct. 19 market crash.
Ruder endorsed that view but, like Federal Reserve Board Chairman Alan S. Greenspan, rejected a proposal that the Fed assume responsibility for coordinating the regulation of trading in stocks, stock futures and stock options. A presidential commission chaired by former Sen. Nicholas F. Brady had suggested the Fed for such a role.
“The Federal Reserve Board lacks the necessary expertise regarding both equity and futures markets,” Ruder said. “Giving it jurisdiction over intermarket matters would require the (Fed) to duplicate the SEC’s existing expertise regarding these markets.”
In a statement reflecting the views of a majority of the five SEC commissioners, Ruder recommended that Congress “give the SEC, the agency with expertise and direct responsibility for the equity markets, final regulatory authority for equity-related products.”
Turf Defended
In response to questions from committee Chairman William Proxmire (D-Wis.), Ruder said the SEC should have “tie-breaking” authority to overrule the CFTC in matters relating to the trading of stock futures, at least to the extent that futures trading is directly related to stock prices.
Proxmire, reacting favorably, said one agency should have power to take charge in a crisis.
But Hineman promptly stepped forward to defend his agency’s turf. The CFTC, created in 1974 to regulate the rapidly expanding futures and options markets that then were growing up in Chicago, is still best equipped to police its own product, he said.
Hineman grudgingly acknowledged the Brady Commission’s view that regulation of the equities and futures markets should be coordinated, but he rejected Brady’s view--accepted by both Greenspan and Ruder--that the stock, options and futures markets have effectively merged into a single mega-market with interrelated problems.
Rather, Hineman said, the stock and futures markets merely “overlap” in “only a small segment of the markets we regulate.”
He added: “We believe cooperation can solve these problems through an equal partnership (with the SEC). If they have tie-breaking authority, then we would have the status of unequal partner. That’s not a partnership.”
Replied Proxmire: “I’m not necessarily interested in a partnership. I want an executive that can act.”
Touching on other Brady Commission proposals, the SEC’s Ruder agreed with most. The SEC commissioners agreed unanimously, for instance, that the stock and futures markets should be coordinated and their trading systems upgraded to handle the vast amount of trading that choked them on Oct. 19 and 20.
Ruder also endorsed the Brady Commission recommendation that most traders be required to put up more cash for their purchases of stock futures. The margin requirement for stocks is 50%, but in the futures markets it runs as low as 10%, and Ruder urged futures margins of at least 20% to 25%.
Ruder recommended limits on the trading of huge blocks of stocks and futures. But he said the SEC commissioners unanimously rejected the Brady Commission proposal that limits be imposed on stock price movements.
Price limits, he said, “are inconsistent with a continuous auction market concept. Such limits may deprive small and large investors of the ability to liquidate positions precisely when these investors need to do so.”
Hineman saw much less in the Brady Commission report to endorse. He declared that the futures markets “performed remarkably well” on Oct. 19 and 20.
He dismissed tougher margin requirements on futures trading but, in contrast to Ruder, fully endorsed the Brady suggestion that limits on price swings, which already exist in the futures market, be imposed on stock trading.
“If the overriding concern is to prevent a repeat of the kind of market drop we saw on Oct. 19,” Hineman said, “the one way I know to assure this is to institute price limits, coordinated across markets.”
