SEC Blames Program Trades for ’88 Dive
Computer-driven program trading was a major force that plunged the stock market into a 140-point loss in January, indicating the volatile conditions prompting last year’s massive crash have not changed, a Securities and Exchange Commission report disclosed Monday.
Rep. Edward Markey (D-Mass.) made the SEC report public to buttress his campaign for unified federal regulation over the stock exchanges and futures markets.
Stock prices are on a roller coaster “whose movement is frighteningly exaggerated by complex trading strategies employed by large institutions with an eye for quick profits,” Markey said. “The first casualties in this new age of highly volatile, institutional trading are individual investors.”
The Dow Jones industrial index suffered its third-largest daily decline ever on Jan. 8, although there was “relatively little fundamental economic news,” according to the SEC report. Complex trading techniques “may have accelerated the steepest portion of the market decline” during the last 90 minutes of trading, the SEC said.
The rapid price swings may be fueled by price differences between the stock exchanges in New York and the Chicago markets that sell stock index futures. Margins--the down payments needed to make an investment--are much lower for the stock index futures, which are contracts to buy and sell bundles of stocks represented by such indexes as the Standard & Poor’s 500.
Strikingly Similar
Big institutions, such as mutual funds and pension funds, use computerized trading strategies to play the stock and futures markets simultaneously and take advantage of even slight price discrepancies.
The SEC staff report said the role of index-related trading in the Jan. 8 decline was “striking” in its similarity to Oct. 14, when the market fell sharply in a nervous prelude to the devastating crash later that month. Markey is convinced that the January drop, combined with the 102-point fall in the Dow index last Thursday, demonstrates the need for a single overseer of trading in stocks and financial futures.
“It is crystal clear that we will not be able to dampen market volatility until we control program trading, either by regulation or legislation,” said Markey, chairman of the House telecommunications and finance subcommittee.
The SEC, which regulates stock trading, wants the authority to regulate financial index futures as well, and Markey is leaning toward that position as he prepares legislation. But the current federal overseer of futures, the Commodity Futures Trading Commission, backed by powerful congressional allies, wants to keep its power without ceding anything to the SEC. Without any reforms to quiet the market’s rampages, Markey believes, individual investors will be frightened away. “Having been fleeced, they are now fleeing the market,” Markey said. With the latest report, “the SEC once again implicates program trading as a major culprit contributing to the volatility that continues to disrupt our markets,” he contends.
The prospect for stock market legislation this year is highly uncertain. The Reagan Administration isn’t sure of its position: The SEC wants more power, while CFTC doesn’t want to lose any authority. The Treasury Department is trying to resolve this dispute by developing a definitive Administration recommendation.
