Program Trades Not a Big Factor : Markets: Regulations implemented since the 1987 crash may have helped, but some professionals were critical.
Program trading--the computer-driven buying and selling of stocks and related securities--played less of a role in Friday’s stock market drop than in 1987’s market crash, partly because of market restrictions implemented since then, traders said Friday.
“There are so many restrictions on program trading in a volatile market, it’s impossible for them to be a significant part of the market,” said one futures trader.
Friday’s market activity triggered program trading restrictions--for the second time on the Chicago Mercantile Exchange, where stock index futures are traded, and for the first time on the New York Stock Exchange, where trading in one stock--Walt Disney Co.--was halted altogether under a new procedure.
The restrictions--so-called circuit breakers and shock absorbers--drew mixed reviews from the traders themselves, but exchange spokesmen said they were pleased. Program trading can cause wild swings in the stock market and was partly blamed for the 1987 crash.
“Program trading doesn’t cause the heightened volatility, but it exaggerates the movements up and down,” said James P. Owen, an opponent of program trading and managing director of NWQ Investment Management Co. in Los Angeles, which manages more than $2 billion for institutional and private investors.
Friday’s stock market drop was blamed mainly on reaction to news that financing had fallen through for the proposed $6.75-billion buyout of UAL Corp., parent of United Airlines. Others blamed troubles in the junk bond market.
But the bad news “tended to bring out the sell programs,” said Christopher Pedersen, a senior vice president and director of trading with Twenty-First Securities Corp. in New York. “But they weren’t necessarily index arbitragers; they were mostly fund managers” looking to cash out equity positions, he added.
Stock index arbitrage, which is one type of program trading, uses computers to exploit price differences between stock index futures and the underlying stocks themselves.
Stock futures are contracts to buy or sell a group of stocks in an index, the best known of which is the Standard & Poor’s 500. Such contracts are traded on futures exchanges, such as the Chicago Mercantile Exchange.
A price difference between the futures and the component stocks can trigger a program trade--either to buy futures and sell stocks (a sell program) or to sell futures and buy stocks (a buy program)--and such programs can influence the market in a big way.
But on Friday, the steep drop in prices triggered measures late in the day to control program trading.
On the Chicago Mercantile Exchange, trading was slowed for only the second time since the measures were adopted. Trading was slowed at 2:07 p.m. CDT when the Standard & Poor’s 500 index fell 12 points from Thursday’s close--equal to about 96 points on the Dow Jones industrial average--and didn’t resume until 2:30 p.m.
That triggered the New York Stock Exchange simultaneously to divert program trades of NYSE-listed stocks of the S&P; 500 for at least five minutes in the first use of the so-called “sidecar” procedure. Under this procedure, buy and sell orders for stocks are paired to assess whether imbalances can be absorbed into the market in an orderly fashion.
Trading in Disney stock was halted altogether at 3:16 p.m. EDT under the procedure.
A spokeswoman for the New York Stock Exchange said the sidecar procedure went smoothly.
Once trading resumed on the Merc, the S&P; index continued to fall, reaching a 30-point low about 15 minutes later. At that time, trading slowed until the exchange closed at 3:15 p.m. CDT.
The result was to stymie index arbitrage. “It means that you don’t know where you are, and it’s impossible to make a trade,” said one frustrated futures trader.
Some traders on the NYSE attempted to end-run the “sidecar” by executing manual trades, but they were not a significant factor, traders said.
“I think (the circuit breaker) did its job in giving the market a slowdown and time to breathe, so you can say at least we did not have a market cascading out of control,” said Richard Sandor, an executive vice president in Drexel Burnham Lambert’s Chicago office. “It did fall freely, and did have the halt, but I think it basically provided breathing room for everyone.”
Not everyone agreed, pointing out that the measures did little to stem the fall. “I happen to feel the circuit breakers are negative to the market. . . . They didn’t accomplish anything,” Pedersen said.
One result of the procedures was to leave futures contracts at a sizable discount--at one point, futures were selling at a nine-point discount to stocks, Pedersen said.
That could put downward pressure on stock prices. “I think we’re going to have to see what happens on Monday and Tuesday,” said Lawrence Kirshbaum, chairman and chief executive of the regional brokerage Prescott, Ball & Turben in Cleveland and a critic of program trading. “Futures closed at a discount Friday, so that will fuel the market on Monday.”
In reaction to the market’s activity, the Merc late Friday raised its margin requirements--the minimum amount of cash that must be invested to trade futures contracts--effective Monday.
Since the New York Stock Exchange began tracking program trading volumes, program trading has accounted for a high of 12.6% of average daily volume in December, 1988, and a low of 7.6% of average daily volume in April, 1989. The latest figures, for August, 1989, found program trading making up 10.3% of average daily volume.
KEY MARKET INDICATORS AT A GLANCE
Stock Indexes Friday close Up/down % change Dow industrial index 2,569.26 down 190.58 -6.9 Dow transportation index 1,406.29 down 78.06 -5.2 Dow utilities index 211.96 down 7.29 -3.3 NYSE composite 185.56 down 11.42 -5.8 AMEX 378.45 down 16.56 -4.2 NASDAQ composite 467.29 down 14.90 -3.1 Standard & Poor’s 500 333.65 down 21.74 -6.1 Wilshire 5,000 3,295.673 down 189.57 -5.4
