‘Time Outs’ Favored to Fight Market Swings : Stocks: An NYSE study group backs away from controls on program trading but urges more trading halts.

A New York Stock Exchange study group Tuesday recommended increased use of trading halts to combat market volatility, but it backed away from urging controls on the computer-directed program trading that some have blamed for the market’s dizzying slides.

In a report commissioned after last October’s market fall, a group headed by General Motors Chairman Roger B. Smith concluded that computer-directed trading isn’t the primary cause of the turbulence--and, moreover, isn’t a great concern to average investors.

It suggested that the best remedy for volatility is to provide more “time out” for investors during crises, to unify market regulation, to ensure greater liquidity for investors in turbulent markets and to better inform the public of the causes of market gyrations.

The “circuit breaker” proposal would halt trading for one hour when the Dow Jones industrial index has moved up or down 100 points from the previous day’s close. The proposal would close trading for 90 minutes when the move was 200 points; for two hours when it was 300 points, and for four hours when it was 400 points or more.

The halts are intended to give investors time to assess their positions and decide what their next move should be. The Big Board already has “circuit breakers” in place that halt trading for one hour if the Dow moves 250 points and for two hours if the index moves 400 points.

The group, which included members of the futures and stock industry, industrialists and academics, concluded that the public’s fears have been fanned by misinformation by the news media.

The report’s conclusions are likely to be highly controversial among the “old guard” segments of the securities industry that sell stocks to individual clients and look with suspicion on the more recently developed, rapid-fire trading of large blocks of securities. Program trading was much criticized after the stock market’s October, 1987, collapse, and again after last Oct. 13, when the Dow Jones index fell 190 points in a single day.

Program trading’s most common form is index arbitrage, in which traders sell huge baskets of stocks and stock index futures to profit from tiny price discrepancies between the markets.

Stephen B. Timbers, who is chief investment officer of Kemper Financial Services and was a panel member, issued a statement saying Kemper “remained concerned” about the effects of index arbitrage and the high level of borrowing now permissible in the markets. Timbers said the firm supported the eight-point plan, however.

Michael Metz, a market analyst with Oppenheimer & Co. and longtime critic of program trading, said the report was “the most unimpressive piece of garbage I’ve seen in a long time.

“It looks like we won’t really address this problem until we have another disaster,” Metz said, adding that he spoke for himself and not for his firm.

But the majority on the panel felt they couldn’t effectively ban program trading but rather could only, at most, force investors to execute such trades abroad, Smith said at a Big Board press conference.

“The worst that could happen would be to drive these trades out of the market,” Smith said at a Big Board press conference. Such a move would in turn further shake the confidence of the small investor, he said.

In connection with the study, the Big Board undertook a study of individual investors’ views that suggested minimal concern about program trading.

About 53% of the direct shareholders whose opinions were sampled said they had never heard of program trading; 18% said the practice “should be controlled.”

Among those who described themselves as “very concerned” about market trends and economic conditions, only 11% said they were very worried about program trading. Thirty-nine percent said they were worried about insider trading, while the largest category--including 58% of respondents--were worried about “the honesty and ethics of stock brokers.”

The study panel also recommended:

* Improved systems to detect intermarket abuses, such as “front running.” The term refers to the practice of using advance information on planned trades of others to profit in trades.

* Entrusting to a single regulatory body the authority to set margins for securities, futures and options.

* Development of new investments that would allow individual investors to protect themselves from market swings.

* A campaign by the exchanges to work with the news media to better inform the public about the causes of volatility.

* Changes to make it easier for corporations to buy back their stock in volatile markets.

The recommendations will be considered by the NYSE’s board of directors, which in turn will propose changes to regulatory agencies and Congress. NYSE Chairman John J. Phelan said he believes the eight points have an “excellent” chance of implementation.