David S. Ruder, chairman of the Securities and Exchange Commission, was interviewed by Times staff writer Paul Richter .
Question: One year after the crash, how risky are the markets?
Ruder: We have risks today because of the nature of the markets, because they are institutional and trading in large portfolios. It’s just amazing how large some of the portfolios are: General Motors has $40 billion in its pension fund; Teachers Insurance & Annuity has $66 billion; California Public Employees Retirement System, $44 billion. We’re talking about people who have the ability to affect the market; any 10 of them together can have enormous influence on the market. So one always wonders what will happen if they all decide to sell--or all decide to buy.
So when one asks, “What’s your level of confidence about everything,” I think that one has to say, “We’ve fixed a lot of things; things are better.” But we still don’t really know what the effects of concentrated institutional decision making will be. My personal thought about this is that institutions ought to ask themselves whether it is in their best interests to try to exit the market more quickly than their brethren.
The analogy has been clear since the market break: Everybody can’t get through the exit at the same time. In any event, if that happens, you’re likely to have a large decrease in the market. And if the result of the large decrease is that the system breaks down, you may have an unfortunately long-term market decline, which won’t do the institutions collectively any good. So my advice to them is that they should look long term.
Q: Are you pointing this out simply as an exhortation to the big institutions, or are you planning to put into effect any rules that would limit such trading?
Ruder: No, I am not. We have looked at the question of what some people call “bracket rationing"--that is, that you say, “Mr. Institution, you can only sell $100 million worth of stocks in portfolio transactions, and then you have to wait an hour.” But we’re not going to make that kind of rule. We believe that’s interference with the market.
Q: What comment do you have for small investors one year after the crash? Should they feel reassured?
Ruder: My comment for them is that they should feel reassured at this point. The market does not seem to be in an overbought condition. And there doesn’t seem to be any likelihood in the near future that there’s going to be a repetition of last October. They should be aware, however, that the market has become increasingly institutional and that their chances of making short-term decisions which are better in terms of market timing than the institutions’ are really remote.
But, interestingly, they have an advantage over institutions in being able to concentrate on a few stocks. And if they’re willing to buy a few stocks, with proper advice, and hold them, then I think they ought to be market participants.
But that advice goes with the advice that they should not be entering the market in order to make trading profits. A little person is simply not able to do that. They might as well go to Las Vegas, to the casino. At the crap table they’ll at least know what their odds are. They won’t know what their odds are in the market.
Q: It sounds like you believe that if the markets do start getting active again, there is some chance of another big price collapse.
Ruder: If the market starts moving up again, and volume begins to move upward, I would expect an accompanying increase in volatility. You’re going to have quick movements in price, many of which seem unrelated to prices of individual stocks. And in the more dramatic sense, you (may) have the compression of volatility that we had in October of 1987, in which the market moves in large amounts.
I think if you follow the last 50 years, you will find that the stock market has moved up and down, in some cases dramatically. Anybody who’s an average investor who reads the stories ought to recognize that between August of 1982 and August, 1987, the market increased from 750 points on the Dow Jones industrial average to 2,700 points on the Dow. And that even at the (October, 1987) low, which was about 1,750, the market was still up 1,000 points over its August, 1982, level.
Let’s assume you went to Africa or some remote place on the first of January, 1987, and came back on the first of January, 1988. You would say, “Well, it wasn’t a very good year--stocks only went up 5%.” And that’s what happened. I think a small investor needs to take a longer-term view of the market.