Investors, Regulators, Exchange Officials Debate in L.A. : Lack of Consensus on Crash May Stall Reform
In recent weeks, regulatory agencies, stock and futures exchanges and special committees have issued reports on the October stock market crash, and at least one theme emerged: The parties couldn’t agree on what reforms should result from the debacle.
On Saturday, representatives of these groups convened in Los Angeles in the first West Coast conference of securities regulators, academics and investors to discuss the crash. And one theme emerged again: The parties couldn’t agree on what reforms should result from the debacle.
The daylong conference at the Bonaventure Hotel, jointly sponsored by the USC and UCLA business schools, provided a lively glimpse into the sharp differences among financial experts on what to do about the crash--differences that many say are increasing the chances that Congress will pass little, if any, significant legislation to alter the markets.
“Congress isn’t going to take drastic action with so many of the experts disagreeing on what should be done,” said Kenneth R. Cone, vice president of strategic planning for the Chicago Mercantile Exchange, in an interview after his remarks to the 250 conferees.
“There are many areas of disagreement that require further study,” said Robert R. Davis, a member of the Commodity Futures Trading Commission. “So the greatest danger is not that we will fail to act, but that we will do the wrong thing to change regulation so as to increase risk and jeopardize our role in the global marketplace.”
To be sure, not all subjects set off fireworks. Participants generally agreed that the October collapse in share prices was the result of a major shift in investor psychology that led to panic selling, and there was very little that any regulatory agency or exchange could have done to prevent it. They also acknowledged that exchanges and regulators are implementing reforms on their own that may abort the need for major changes from Congress.
But beyond that, differences abounded, ranging from whether computerized program trading should be curbed to whether daily price limits should be installed to limit volatility.
The disagreements were not surprising given the long-simmering rivalries between the various parties represented.
Roger M. Kubarych, chief economist of the New York Stock Exchange, which wants less volatility, defended the Big Board’s new limits on program trading, which are intended to help markets settle down. But Cone, whose Chicago Merc is a futures exchange that thrives on volatility, said the NYSE program trading limits could add to market chaos during a panic.
Kenneth Lehn, chief economist at the Securities and Exchange Commission, argued for his agency’s desire to regulate stock-index futures. But Paula Tosini, director of economic analysis at the CFTC, maintained her commission’s right to retain oversight of all futures.
Bernard S. Black, an SEC lawyer, advocated the institution of “flow restrictors” to limit the volume of stock that big investors could sell during a certain period. But most of the economists in attendance--many of whom are influenced by the University of Chicago school of laissez-faire financial theory--wanted less regulation.
Robert G. Kirby, chairman of Los Angeles-based Capital Guardian Trust and a member of the Brady Commission, which studied the crash, advocated the commission’s view that differing requirements on margins--the down payments required to trade in certain products--ought to be “harmonized.” In stocks, margins are set as high as 50%, while in stock-index futures margins are as low as 12%.
Consolidating Power
But Merton Miller, a finance professor at the University of Chicago who headed a Chicago Merc study on the crash, argued that margins in futures had nothing to do with causing the crash and that raising margins in stock-index futures--a likely result if regulation were turned over to the SEC--would kill demand for them and deprive institutional investors of a major way to hedge their risks.
Perhaps the sharpest disagreement came over the issue of whether one regulator, most likely the SEC, should oversee the stock and stock-index futures markets. Sen. William Proxmire (D-Wisc.), chairman of the Senate Banking Committee, which oversees the SEC, called the present system “the most ineffective and inefficient regulation known to man,” saying that stocks and stock-index futures are linked to each other in one market.
“Having the regulator of corn and pork bellies regulate equities doesn’t make any sense,” he said, adding that having three different regulators in the banking industry creates “competition in laxity to see who can do the sloppiest job.” Proxmire said he foresaw a better than a 50-50 chance that Congress would act to combine regulatory authority in one agency. (The agriculture committees of Congress oversee the CFTC.)
But Tosini, of the CFTC, said competition between regulators has worked with futures in farm products, oil and Treasury bonds--which her commission regulates in coordination with other agencies. Having one regulator for stocks and stock-index futures “wouldn’t have changed what happened on Oct. 19 or (produced) more efficient capital markets,” she said.
