House Votes to Give the SEC Clout to Curb Market Panic : Wall Street: If passed by Senate, the legislation would let the agency shut down exchanges. But its success is uncertain.
The House voted Tuesday to give the Securities and Exchange Commission broad new powers to control runaway stock markets by shutting down exchanges or banning trading techniques that may cause securities prices to fluctuate wildly.
“Congress can’t be expected to legislate ‘up’ markets or prohibit ‘down’ markets,” said Rep. Edward J. Markey (D-Mass.), a key author of the House bill. “But we should provide for orderly market declines that lessen the possibility of panic selling.”
The bill was approved by a voice vote. It would give the SEC new authority to impose drastic 10-day emergency powers: The agency could alter exchange operating hours, dictate limits on stock purchases or sales by investors and even suspend any of its own rules.
Computer-driven stock trading, which has caused dramatic swings in stock prices, could be banned by the SEC under the House bill. The 1987 stock market crash, in which the computers of big financial institutions triggered massive selling, caused many frightened small investors to flee the market.
The House bill “will help to instill confidence in the small investor and hopefully will bring that investor back into the market,” said Rep. Matthew J. Rinaldo (R-N.J.). The House bill enhances the authority of the SEC by allowing it to shut down an entire exchange unless the President objects. Under current law, the SEC must get presidential permission before it can halt all trading.
Despite easy approval in the House, the stock market reform bill faces an uncertain future. Similar legislation has been approved by the Senate Banking Committee but has not yet reached the Senate floor.
The stock market bill will become embroiled in a bitter fight over the Bush Administration’s separate proposal to give the SEC power to regulate trading in a complex financial instrument, the stock-index future. The most popular version, on the Chicago Board of Trade, gives investors a chance to speculate on future movements in the Standard & Poor’s index of 500 separate stocks.
The 1987 stock market crash was intensified by a decline in the stock-index futures in Chicago, prompting immediate and massive selling of individual shares on the New York Stock Exchange, according to the Administration analysis.
The Commodity Futures Trading Commission, traditional overseer of futures trading in soybeans, wheat and other agricultural goods, regulates the stock-index future. The agency is strongly supported by its own congressional regulators--the members of the House and Senate agriculture committees. The legislators don’t want any power stripped from an agency under their jurisdiction.
“There is a close relationship between stock futures and common stocks,” Treasury Secretary Nicholas F. Brady said Tuesday, as the Administration sent Congress its bill to give the SEC power over securities-index futures. “We’ve studied this issue hard . . . and the basic conclusion is (that) there is one market,” he said.
Giving the SEC the new authority is “good common sense,” the Treasury secretary said.
But the Administration proposal faces determined opposition from influential Democrats in Congress and from the Chicago futures traders, a rich and politically sophisticated community. The contest also can be viewed as old money versus new: The Wall Street community threatened by a loss of retail stock-buying customers, against the brash newcomers from Chicago, enjoying a boom from the wave of speculative activity in the more daring futures investments.
Sen. Patrick J. Leahy (D-Vt.), chairman of the Senate Agriculture Committee, fired a rhetorical salvo at the Administration, saying its plan to give more power to the SEC “is false advertising. It will not prevent another crash in the stock market. By weakening the CFTC it will guarantee future commodity scandals that will hurt farmers and consumers across America.”
The House Agriculture Committee chairman, Rep. E. (Kika) de la Garza (D-Tex.), said: “Simply moving the regulatory authority for stock-index futures from one agency to another is not a solution.”
The Chicago Board of trade also was quick to respond, calling the Administration plan “regulatory imperialism.”
“What will the SEC want to control next?” asked board spokesman Michael O’Connell. “This is a piecemeal approach (that) can irreparably harm America’s competitive stance in the global marketplace.”
Fear of another stock market crash is the common element behind both the House bill and the Administration plan.
On Oct. 1, 1987, the Dow Jones industrial index of key blue chip stocks on the New York Stock Exchange plunged 508 points, losing 23% of its value.
Wall Street firms and many members of the public blamed the crash on program trading, in which a decline in the price of stock futures or some other event automatically triggers computers to direct massive sales of stocks.
Prices collapsed because big players--mutual funds, banks, pension funds, insurance companies--were trying to sell when no one wanted to buy. The markets become like a narrow doorway, with two 350-pound football linemen jammed together, trying to get out but unable to move.
The House bill would give the SEC unquestioned power to halt program trading or any other technique if the agency feels that orderly markets are being threatened.
“When program trading strategies push the limits of our markets to the near-breaking point, we should put speed limits on our high-tech traders,” Markey said. “My bill today does just that.”
