NYSE Chief Urges Steps to Limit Market Volatility

New York Stock Exchange Chairman John J. Phelan Jr. said Tuesday that the stock market could be destroyed unless steps are taken to limit the wild swings in share prices that have the investment world in an uproar.

“A lot of people think it is a New York Stock Exchange issue,” Phelan said in an interview. “It is a national issue; liquidity in all markets and volatility in all markets. If it keeps up long enough, it is going to destroy the markets as a capital-raising mechanism, much less as a place where people can invest intelligently.

“It affects individual investors because they get frightened to death of this volatility that is there, and we don’t blame them,” Phelan said.

Phelan’s remarks came amid a groundswell of complaints about how the waves of buying and selling that are ordered by computer programs have produced wide swings in stock prices within a matter of minutes. Firms whose stocks are listed on the exchange, brokerage houses and large investment funds have said this trading technique injures a broad base of companies and investors.

The debate over computerized program trading and stock market volatility moves from Wall Street to Washington today, when Phelan meets behind closed doors with members of the House telecommunications and finance subcommittee, chaired by Rep. Edward J. Markey (D-Mass.).

On Thursday, Phelan will preside over a New York Stock Exchange board of governors meeting, from which he expects a Wall Street strategy to develop on how to deal with the market controversy.

“We are going to try to solve some of the short-term problems,” Phelan said. “It bothers us. It should bother everybody. That doesn’t mean you can’t do anything about it. That doesn’t mean volatility is inevitable, but there is great danger you are likely to get more of this in the short term.”

The latest controversy over program trading and stock price swings was triggered by the 190-point drop in the Dow Jones industrial index on Oct. 13 and by rapid fluctuations in stock prices on several other days in October. On Tuesday, Shearson Lehman Hutton Inc. became the latest major brokerage to announce that it was halting certain forms of program trading for its clients because of concerns over volatility.

“It has become increasingly clear since the afternoon of Oct. 13 that volatility is damaging the financial markets and the ability of corporate America to raise capital efficiently,” said Shearson President Jeffrey B. Lane.

“It is critically important for the investment community and securities industry to help minimize sudden, destructive moves in the market.”

In addition to halting program trading for its clients, Shearson called for a broad range of regulatory changes, including setting new limits on stock price swings, restricting electronic trading access to the NYSE during periods of market instability and putting a single regulator in charge of the stock market in New York and the options and futures markets in Chicago.

Program trading refers to a broad range of computerized trading strategies involving the purchase and sale of numerous stocks simultaneously. The most controversial form of program trading, and the one that Shearson and the other firms are suspending, is index arbitrage, which centers around the simultaneous trading of hundreds of stocks in New York and stock futures contracts in Chicago. The stock futures give investors the opportunity to buy or sell a broad-based market average, such as Standard & Poor’s average of 500 common stocks.

Phelan expressed frustration Tuesday over the criticism he has received in recent days for not taking a stronger public stance on program trading and market volatility. He said he was surprised by the outpouring of emotion, which swelled a few weeks after the Dow’s 190-point plunge.