Suggested curbs meet scepticism

Press, 23 January 1988, Page 31

Suggested curbs meet scepticism

By

Cal Mankowski of

Reuters (through NZPA) New York Wall Street professionals are sceptical about a Presidential task force’s call for tough new regulations to curb wild swings in the stock market such as last October 19’s "Black Monday” and Friday’s steep plunge.

The task force, which investigated the October crash, released its report on Friday as the Dow Jones Industrial Average tumbled 140 points. The report of the task force, led by Mr Nicholas Brady, called for a new agency to co-ordinate securities regulation. .

It also recommended co-ordinating existing “circuit-breaker mechanisms” such as daily pricechange limits on stock index futures and trading halts triggered by order imbalances in stocks.

The report proposed creation of a unified system of clearing and settling trades, and suggested that the Federal Reserve System should assume a central supervisory role.

The crash was driven by a small number of major market players rather than a stampede of small investors, the report said.

Though the record stock market price declines and trading volume led many to believe that large numbers of investors were all selling off their stocks that day, “In reality a limited number of investors played the dominant role during this tumultuous period.” “Much of the selling pressure was concentrated in the hands of surprisingly few institutions. A handful of large investors provided the impetus for the sharpness of the decline.” On the New York Stock Exchange, 604 million shares worth nearly SUS2I billion changed hands on October 19. “In the stock market, the top four sellers alone accounted for $2.85 billion, or 14 per cent of total sales. The top 15 sellers as a group accounted for $4.1 billion, or about 20 per cent of total sales.” Block sales of individual stocks by just a few mutual funds accounted for another SUS9OOM in sales, and about 90 per cent of these sales were

executed by a single mutual fund group, the task force said. Of the futures market, it said the top 10 sellers accounted for the equivalent of SUSBS billion in sales, or roughly 50 per cent of total volume. Computer-driven sales by just three so-called portfolio insurance firms accounted for nearly 10 per cent of the $2l billion of share sales on the New York Stock Exchange, the report said. Mr Brady, asked if Friday’s market plunge could have occurred if his panel’s recommendations had already been in effect, replied, “I don’t think so. I think it would certainly help.”

Wall Street executives and traders who handle big blocks of stock for institutions are critical of the proposal to limit price swings in stocks. “I don’t think it’s a particularly good idea,” said Mr Donald Marron, chairman of the Paine Webber Group. He told Reuters limits would "take away the heart of the system" and serve only to drive trading activity to foreign markets. The executives said they wanted more time to study other proposals in the report. Mr Brady, head of the investment banking firm, Dillon Read and Company, said the Federal Reserve Board should have broad powers to set limits on price swings, futures positions, and trading volume.

The report said that with the powers, which it called “circuit breakers,” the Federal Reserve Board could limit credit risks and loss of financial confidence by providing for a “time-out” amid hectic trading. “They would protect markets and investors,” it said. But Mr Sam Hunter, senior vice-president and head of equity trading at Drexel Burnham Lambert, said, “I’m dead set against any price limits on stocks.” Such limits existed in Japan, but the market there “is more of a domestic market.” In the American market, Mr Hunter said, "it would be a disaster. It doesn’t change the direction or where the price goes eventually.”

Mr George Ball, chairman and chief executive of Prudential Bache Securities, said a daily limit of perhaps 15 per cent would be tolerable. Limits as narrow as 4 per cent would be artificial and would interfere with market liquidity, he said. On the subject of regulatory oversight of the markets, Mr Ball said, “I would prefer a broader role for the Securities and Exchange Commission” instead of more power for the Federal Reserve Board.