Ruling Prompts Limit on Trading of ‘Stock Baskets’

The Philadelphia and American stock exchanges on Monday limited trading in their new “stock basket” products because of legal uncertainty over which government agency should regulate them.

The exchanges, which began offering stock baskets to investors three months ago, also denounced a Chicago federal court ruling that suddenly has thrown the products’ legitimacy into question.

“The real loser in this controversy is the American investor,” said Amex President Kenneth R. Leibler.

Philadelphia Exchange President Nicholas A. Giordano said Friday’s decision by the 7th U.S. Circuit Court of Appeals was “a major step backward in the regulation and development of innovative new products.”

Stock baskets are financial innovations priced to reflect changes in broad market indexes such as the Standard & Poor’s 500-stock index. Investors receive quarterly cash payments equal to a proportionate share of any regular cash dividend declared on the stocks in the index.

The exchanges said trading in stock baskets would be largely restricted to liquidation, meaning that holders would be able to sell them for cash. Market makers at the exchanges are obligated to buy them if no other buyers emerge to ensure an orderly market and prevent panic selling.

The uncertainty over stock baskets was raised Friday by the Chicago court, which ruled that such products resemble commodity futures, such as those for pork bellies and grain, and should be monitored by the Commodity Futures Trading Commission, not the Securities and Exchange Commission.