NYSE Chief Backs SEC Control Over Program Trading

Under pressure to calm Wall Street volatility, New York Stock Exchange Chairman John J. Phelan Jr. said Wednesday that he generally favored giving the Securities and Exchange Commission new powers to short-circuit computer-driven program trading.

In the past, Phelan had taken the view that program trading strategies were here to stay, suggesting that investors should learn to live with a volatile market.

But on Wednesday he said he “would favor giving the SEC the power to stop program trading if we can work out the language and how it should be done.”

Phelan spoke briefly with reporters after testifying before a closed session of a House subcommittee reviewing Wall Street reform legislation that would, in part, give the SEC new powers to deal with volatile markets.

But Phelan made it clear that the issue was very complex and said he would work with the Congress and the SEC to design safeguards that would be effective.

Program trading is computer-assisted buying or selling of large amounts of stocks in conjunction with stock index futures and options at high speeds.

That trading was suspected as the cause of the October, 1987, crash and a recent bout of volatile trading that began with a 190-point Dow industrials plunge on Oct. 13.

Rep. Edward Markey (D-Mass.), chairman of the subcommittee looking into possible market reforms, said one possible change was to allow the SEC to halt all stock exchange trading for 24 hours, as well as to stop program trading, during huge market swings.

Many on Wall Street believe that program trading in stock index arbitrage, the most common form of program trading, helped fuel the wild swings in the market that have dismayed small investors.

Several major Wall Street brokerages have recently eliminated or cut back on computer-based program trading in response to increasingly vocal critics. Those that have reduced such trading include Shearson Lehman Hutton Inc., Paine Webber Group, Kidder, Peabody & Co. and Merrill Lynch & Co.

In a related development, Wall Street sources said the New York Stock Exchange will explore proposals today to curb the volatility caused by program trading, including possibly reviving the “collar” that banned computer trading when stocks moved too sharply.

The board’s regular monthly meeting today will also consider other ways of holding down volatility in the face of growing discontent among the investing public, they said.

The collar would prohibit the use of the NYSE automated order system for program trades whenever the Dow Jones industrial index moved to a 50-point gain or loss in a session.