NYSE Votes to Tighten Program Trading Rules : ‘SuperDot’ Arbitrage System to Be Suspended if Dow Index Moves More Than 50 Points in One Day
Citing a need to restore shaken investor confidence, the New York Stock Exchange on Thursday tightened restrictions on computer-triggered “program trading,” which many experts have assigned a key role in October’s stock market crash.
The exchange’s board voted to prohibit members from using the Big Board’s high-speed “SuperDot” trade execution system for a kind of program trading called index arbitrage if the Dow Jones industrial average moves more than 50 points within a day’s session.
In index arbitrage, investors seek to cash in on tiny price differences between stock index futures and the underlying stocks, selling whichever is more expensive and buying the cheaper. As they buy and sell millions of shares of stocks and futures contracts, the rapid slide of prices takes on a seemingly irresistible force, frightening other investors.
Pressure From Congress
Use of the exchange’s computer link helps traders to execute such trades at high speeds.
The move came as the securities industry faces scrutiny from Congress. Some legislators are calling for regulatory action to prevent a recurrence of the Oct. 19 crash, while industry officials insist that they can make needed reforms without government intervention.
Big Board Chairman John J. Phelan, who will testify tomorrow before the Senate Banking Committee, said in a statement that the move is a step “toward limiting the potential market volatility caused by program trading, and reinforcing investor confidence. . . . “
Program trading has been blamed in part for the October debacle in studies of the crash prepared by the New York Stock Exchange, a presidential study panel headed by former Sen. Nicholas F. Brady, the U.S. General Accounting Office, and the Securities and Exchange Commission.
Other Measures Considered
Program traders will be able to still carry on index arbitrage through the regular market system without SuperDot, as they did before the computer link existed. But the restrictions will slow them down, said Richard Torrenzano, an exchange vice president and chief spokesman.
“This is one step to try to curb volatility and restore investor confidence,” said Torrenzano, noting that the exchange has received hundreds of letters urging it to take measures to reduce the volatility.
He said the exchange is also considering other measures, though he declined to identify them. The exchange last month began an experiment in which it asked member firms not to engage in any program trading through the computer link if the Dow moved over 75 points in the course of a session. The Dow has not moved 75 points since the experiment was begun, and many critics said the 75-point spread was too broad for the voluntary limit to have much impact.
But the Dow has moved 50 points 23 times in the past 13 months, exchange officials said.
The action must still receive approval from the Securities and Exchange Commission. While the exchange awaits that approval, it will continue the voluntary pilot program, but with the threshold level lowered to 50 points.
Exchange officials said they decided on the 50-point limit after hearing reaction of investors and industry firms to the pilot program.
A spokesman for the Wall Street firm of Shearson Lehman Hutton Inc. hailed the action, saying the firm was in “full support” of the measure. Two weeks ago Shearson, saying it was responding to concerns about volatility, announced that it would cease all program trading for its own account.
An opponent of program trading said the step was “putting a Band-Aid over a cancer.”
“It will slow them down, but it won’t end the practice by any means,” said Philip B. Erlanger, vice president of Advest, in Hartford, Conn. “Investors’ attitude toward the market has soured so much, we’re really got to end this altogether.”
There was no comment from some of Wall Street’s largest index arbitrage investors, including Kidder, Peabody & Co., Salomon Inc., Goldman, Sachs & Co. and Morgan Stanley & Co.
