NEW YORK — Eric Seff is torn on the subject of the controversial computerized trading practices that exacerbated the stock market's violent wrenching on Sept. 11 and 12.
"It's the closest thing to making money without working I've ever found," said Seff, the investment manager for Chase Manhattan's investment subsidiary, Chase Investors Management.
But, in a more philosophical mood, Seff said he finds program trading "really scary."
It is not, he said, just that smaller investors are being scared out of the market by the well-endowed players of the game, in which computer programs advise on buy-and-sell decisions based on price disparities between different markets.
But should the stock market ever return on its own to the higher levels of volatility it has known in the past, he fears that the added presence of program trading could trigger a disastrous nose dive, if not an out-and-out collapse.
"What if we're on our way back to average or above-average volatility and on top of that you add the aggravation of these programs?" Seff asked. "I think the prospects for a true collapse are slim, but I find this a really scary thought."
After taking the blame for Wall Street's worst week ever--a week that saw the Dow Jones industrial average tumble a record 86 points in a single day, Sept. 11--program trading is back in the spotlight.
Regulators have redoubled their review of the trading strategy. Some major corporations whose stocks get whipsawed by the churning are voicing concern--albeit privately--that the volatility from program trading is reducing investor interest in their stocks.
And even some of the firms that have found a gold mine in program trading are advocating a careful review of its effects on volatility.
"Whatever (the regulators) have got to do to calm this down, I would support," said Robert N. Gordon, president of Twenty-First Securities, a New York investment boutique that specializes in program trading. "If that means no more program trading, OK, so long as they leave us with the (stock index, options and futures) tools that have been proven to take the volatility out of the market." Jack Barbanel, director of futures trading at Gruntal & Co., also calls for "some sort of solution, and fast," because of concern that program trading already has caused the marketplace a loss of credibility with the public.
"Already there's enough nervousness in the market about the economy," Barbanel said, "and then you couple that with (Wall Street's) insider-trading scandal and this program trading business and how could you think the public isn't somewhat insecure?"
Adding to the public nervousness, he asserts, was the "finger-pointing that went on among many of the leading program traders" after the 86-point drop in the Dow.
Concerns Over Deficit
"The next day, program traders were saying the market dropped because of concerns over the deficit and other economic factors and that it had nothing to do with program trades," Barbanel said. "Now it seems very curious that everybody woke up on (that) Thursday deciding that there suddenly was a change in sentiment over the economy. Usually there is some hint when sentiment is changing and there was absolutely none. Of course program trading was behind it."
Barbanel and a small but growing cadre of financial specialists advocate a range of remedies--from a formal disclosure to investors that the advent of high-speed computers and sophisticated computer programs have changed the character of the market, to a change in the expiration dates of the financial instruments central to the program trades.
A more vocal group advocates a hands-off approach. Program trading, they say, has already survived as a profitable trading technique far longer than anyone anticipated and could run out of steam on its own any time.
For all the emotion it has set off, program trading is very much an unemotional trading strategy.
No subjective considerations like consumer confidence, corporate earnings trends or anticipated economic strengths and weaknesses are factored into the selection of stocks to buy or sell. Only the numbers matter.
In one of the most popular types of program trades, traders can earn millions of dollars with very little risk simply by tracking two numbers: the price of a stock index futures contract and the level of the underlying stock index.
The former is an agreement to buy or sell the cash value of the stock index at a specified price on a certain date.
Different Forms of Products
These are simply different forms of identical products traded in separate markets. One reflects stocks' current prices while the other represents investors' expectations of what those stocks will be worth a few months later.
The two numbers often converge. But when they get out of kilter, traders can profit by simultaneously selling the more expensive of the two and buying the cheaper one.