Regan Urges a Ban on Program Trading

Former White House chief of staff and Wall Street veteran Donald T. Regan said Thursday that computer-driven program trading is undermining the foundations of the economy and should be banned or severely curtailed.

Program traders take advantage of fleeting and minute price differences between underlying stocks and contracts to buy them in the future and Regan said the high-return, risk-free trades were undermining the economy.

“I think both index arbitrage (a form of program trading) and stock market futures should be banned or severely curtailed,” Regan told a House subcommittee.

Program trading, blamed for worsening the October, 1987, crash, returned to haunt Wall Street last month when critics said it accelerated a stock market downturn into a full-blown free fall.

Large investment houses, many of which say they have stopped program trades, industry leaders and small shareholders alike have since called for an end to programs, guided by computers that spot tiny, but lucrative, profit margins.

Regan, who also served as Treasury secretary under President Ronald Reagan, made it clear that index arbitrage and stock market futures were terrifying the small investor who was increasingly leaving the stock market.

“Individuals are threatened and concerned by the violent ups and downs, so much so they are no longer investors or have cut the portion of their investments devoted to stocks,” said Regan.

He was among a panel of Wall Street experts testifying before a House subcommittee that is considering legislation that would allow the Securities and Exchange Commission to halt program trades during volatile markets.

The SEC presently has the power to clamp down on program trades only when the market seems out of control.

Regan said control rested presently with big players, saying markets were more and more in the hands of large institutions and security dealers.

“At the rate we’re going, institutions will soon own 80% to 90% of all common stocks. I don’t think that is a healthy situation for the American economy,” he said.

“We, in part, are turning our backs on one of the pillars of American economy, our stock market,” said Regan, who headed Merrill Lynch & Co. before joining the Reagan Administration.

Regan recommended that at the very least, stringent stock market rules should be applied to stock index futures.