3 Firms Made 53% of Program Trades in July : Morgan Stanley Tops 1st Activity Report by NYSE

Morgan Stanley & Co., Merrill Lynch & Co. and Bear, Stearns & Co. were by far the biggest practitioners last month of the controversial stock market techniques called program trading, according to New York Stock Exchange figures disclosed Monday.

In the first of what are to be regular analyses, the Big Board found that the three big brokerage firms accounted for about 53% of all program trading, an activity that has been blamed by some for destabilizing the market and contributing to the October crash. Morgan Stanley was No. 1 with 25% of all program trading volume, followed by Merrill Lynch with 18% and Bear Stearns with 10%.

The exchange’s research found that program trading accounted for an average of 16.9 million shares a day, or 10.1% of the exchange’s average daily volume of 166.9 million shares.

In program trading, investors follow the lightning-quick calculations of computers to decide when to buy and sell huge baskets of different stocks. Critics have charged that the momentum created by such buying and selling can upend the market at critical moments and contributed to the cascade of selling last Oct. 19 and 20.

The 10.1% figure is at the low end of usual estimates of the scale of program trading activity. The New York Stock Exchange said Monday that program trading generally accounts for 10% to 15% of all transactions; other analysts have estimated that program trading represents as much as 30% of the trading action on some days.

Unhappy With Disclosure

The exchange decided to collect the data to improve information on what has been a hot topic in the post-crash debate over market reform.

Some of the biggest program traders are known to have been unhappy that their names would be released in connection with the analyses of program trading. Yet some brokerage officials said they believed that the analysis would not reflect badly on the industry.

“I think it’s going to allay a lot of fears,” said a brokerage official who asked not to be identified. “I think a lot of people think it’s a bigger part of the market than 10%.”

But others--including some longtime foes of the practice--pointed out that the market’s current becalmed state is one reason for the seemingly low level of program trading activity.

“Ten percent can create a lot of volatility if it is concentrated in a small period of time,” said Jack Barbanel, head of futures trading for Gruntal & Co., a regional brokerage based in New York. “And if the market picked up, that 10% could become a lot bigger number.”

The Big Board defined program trading to include a wide range of computer-directed techniques. One is index arbitrage, a technique in which investors buy and sell block of stocks and stock index futures to try to profit on discrepancies between the two markets.

Officer Sees Benefit

About 65% of the July’s program trading was of the index arbitrage variety, the analysis found.

Asked for comment, Alan C. (Ace) Greenberg, chairman of Bear Stearns, voiced the view that index arbitrage actually benefits the securities markets by smoothing price discrepancies between them and by increasing the number of buyers and sellers. “This is one of the things we do to make the markets work better,” he said.

The analysis showed that 62.6% of the trades were executed by the firms on behalf of clients, while 29.9% were executed for the firms’ own accounts.