Morgan Stanley Resumes Program Trading for Its Account

Morgan Stanley Inc. said Wednesday that it has resumed stock index arbitrage trading for its own account, saying it was returning to the controversial “program trading” activity because markets have become less volatile.

Morgan Stanley is one of the pioneers and a major practitioner of program trading, which is computer-directed buying and selling of stocks and stock index futures to take advantage of price discrepancies between futures and stocks. The strategy is also used for stock options.

Morgan Stanley joined a number of major firms in halting program trading for its own account in May, 1988. It continued to engage in index arbitrage for clients’ accounts.

Paine Webber Group Inc., Bear Stearns Cos., Salomon Bros. and Kidder, Peabody & Co. were the other firms that curtailed program trading at the time. The firms accounted for the vast majority of the index arbitrage on Wall Street. Bear Stearns has since resumed.

Morgan Stanley said it will only do the computer trading when market conditions are normal, and refrain from it during periods of market stress.

In resuming index arbitrage for its own account, Morgan Stanley said the industry has restored the confidence of small investors in the aftermath of the October, 1987, stock market crash and its return to index arbitrage poses no threat.

sh Called Factor in Crash

Program trading, which includes various computer trading strategies such as stock arbitrage and portfolio insurance, was blamed by some as a factor in the crash and for market volatility in general. Critics cite the large volume of rapid-fire transactions that swamp the markets during program trades as a cause of volatility.