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Program Trading Lives--Some Ask Why : Lifting of Ban by Big Board Delights Fans, Enrages Foes, Surprises All

November 12, 1987|DEBRA WHITEFIELD | Times Staff Writer

NEW YORK — Judging from Wall Street's reaction, one might have thought New York Stock Exchange Chairman John J. Phelan was resurrecting the dead last Friday when, in fact, he was only lifting the 2-week-old strictures on computerized program trading.

"I had given it up for dead," said a pleasantly surprised program trader at one of Wall Street's largest investment houses. "At the very least, we were sure there would be so many restrictions that it would be an absolute waste of our time."

Philip B. Erlanger was also "shocked as hell" by the Big Board's "unbelievably irresponsible" decision. "It's like giving a second chemistry set to a child after he blew up the first one," said the chief technical analyst for the Advest investment firm in Hartford, Conn.

Program trading--which enables securities firms to make money by capitalizing on small price discrepancies between stock index futures and the underlying stocks that compose the index--has been flaring tempers ever since its introduction to the U.S. financial markets in 1982. But in the aftermath of charges by Phelan and others that it was a key perpetrator of last month's stock market crash and Phelan's subsequent surprise decision to lift all curbs on the controversial trading maneuver after less than two weeks, program trading is stirring controversy as never before.

Lobby With Clout

This time, it shares the spotlight with one of its most vocal critics--Phelan.

"Pressure was brought to bear" by some "very powerful firms that find program trading very profitable," said veteran brokerage analyst Perrin Long with Lipper Analytical Services.

"This is a very powerful lobby you're dealing with, and they didn't like having their gold mine taken away," said Michael Metz, a market strategist for Oppenheimer & Co. who described himself as "blinded with rage" by Phelan's "astonishing" decision.

"Tongues are wagging that the New York Stock Exchange was threatened with a lawsuit" for overstepping its authority under federal securities laws, said the chief investment officer for a Wall Street firm that doesn't engage in program trading.

These are widely held views in the financial markets but unsubstantiated ones. Phelan has declined to discuss his motivation. And the major program traders--Goldman Sachs, Morgan Stanley, Solomon Bros. and First Boston--either refuse to discuss the matter or deny having pressured or threatened exchange officials.

NYSE officials acknowledge that Phelan's decision followed consultations with NYSE member firms, as well as with legislators investigating the role of program trading in the Oct. 19 crash and with executives of the nation's futures exchanges, whose livelihoods were threatened by the prospect of program trading's demise.

But the NYSE officials insist that the Big Board always intended to ease back to normalcy--both in terms of hours and allowing computerized program trades--once the market's volume and volatility waned.

As for speculation that Phelan caved in to threats of a lawsuit, an NYSE spokeswoman said: "We never stopped anyone from using our automated order system; we only requested that they not use it. How could anyone build a (legal) case on that?"

Exchange officials also challenge critics' charges that Phelan's action was premature by noting that both program trading and the overall trading volume have been quite light after full-fledged program trading was permitted to resume.

Calls It Inhibiting

"It will be damned difficult for the (Reagan-appointed) Brady group to claim that program trading causes difficulties in the market if nothing happens now that program trading is back," Long agreed. A commission headed by Dillon Read Chairman Nicholas Brady is investigating the market crash.

Metz, however, thinks people are "misgauging the impact" of resumed program trading. "I don't see how anyone can argue that it isn't profoundly inhibiting real investment by real investors," he said.

Many market analysts believe that the trading volume has diminished this week because small investors are waiting on the sidelines--afraid that those securities firms that base their trading decisions strictly on a computer program increase the risk for small investors in a touchy market environment.

The latest saga in program trading's short life began Oct. 19, when the Dow Jones industrial average took an unprecedented 508-point plunge and panic consumed the world financial markets.

Phelan and others immediately pointed a finger at program trading, which critics accuse of heightening market volatility. This charge stems from the fact that huge quantities of stocks are traded instantaneously through program trading, which in turn can intensify the magnitude of price swings.

Accounted for Heavy Share

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