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If It's Broke, Fix It

January 12, 1988

The President's Task Force on Market Mechanisms has proposed only mild reforms in response to the Oct. 19 stock market crash. That is unfortunate. The almost uncontrolled slide of the market again last Friday demonstrated that there are serious fundamental problems that will not respond to mere tinkering. But at least the report provides a starting point.

"What we're talking about is a reordering of regulation," Nicholas F. Brady, chairman of the task force, said, acknowledging that the recommendations call for "relatively minor changes." The adequacy of such a response must be judged against the candid appraisal of one of the members of the task force, Robert N. Kirby of Los Angeles, who concluded that the market collapse "called into question the integrity of the markets themselves." The report itself, in a detailed analysis of what happened, dramatizes the inadequacy of the present system to handle crises, and the risk of Black Monday happening all over again.

The Brady Commission made five principal recommendations, calling for (1) a single oversight agency, preferably the Federal Reserve Board, for stock, options and index futures markets, (2) a unified clearing system, (3) consistent margin requirements, (4) some "circuit-breaker" mechanism to dampen crises in the market, and (5) a new information system that would allow better monitoring of all markets.

We agree with the recommendation for a single center of control, but the Federal Reserve may not be the appropriate agency. It would seem more logical, and more in keeping with actual experience, to give that authority to the Securities and Exchange Commission, which already has regulatory responsibility for the securities markets. It has been an anomaly to have the Commodity Futures Trading Commission regulating the stock-index futures market just because index futures are traded alongside hog bellies in Chicago. The task force itself recognized the enormous effect of index futures trading on the stock market in the October crisis.

There is the likelihood that a vigorous SEC--with authority covering the range of stock, options and futures markets--would facilitate the other reforms proposed. That would depend on leadership, however. Government agencies have not always used well the power that they already have, although this is not addressed in the report. Coordinated margin requirements make sense, but the Federal Reserve could have ordered higher margins on the stock market long ago. There already are "circuit breakers," including trading limits and authority to cut off trading, but the commission did not suggest how these emergency measures might be used more effectively to dampen exaggerated market responses without damaging the liquidity that is the essence of the marketplace.

The report identifies some areas that require further investigation and action. There are, for example, unanswered questions about the extraordinary influence wielded by a handful of giant traders as the market began to collapse. And, while citing the negative effect of computer-driven programmed trading that--as Brady noted in his press conference--"produced an enormous amount of volume," the report made no recommendations about what to do to control the negative and disruptive consequences of these practices.

Another area that requires investigation is the proliferation of financial instruments. Regulators must take a careful look at the problem, evaluating what have been created before approving any new instruments. Some of the newer instruments have played a significant role in creating the casino atmosphere that now surrounds the financial marketplace. Consumers have a right to expect regulators to distinguish between the gambling spirit of Las Vegas and the economics of financing American business and industry.

President Reagan has distanced himself from all of this. If he is merely biding his time until other investigations--including that of the SEC--are finished, that is understandable. But it would help matters if the President would let the nation know that he understands how serious this problem is and that he is prepared to act. The magic has gone out of this marketplace, and neglect will not bring back its vitality.

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