NEW YORK — As a mass of investors fled the markets after the crash, a mass of experts rushed in to find out what went wrong.
Market specialists from Wall Street, government and academia evaluated and calculated, grinding out 12 reports that filled more than 3,000 pages and 3 linear feet of shelf space. It was by far the most searching analysis of the financial markets in 50 years, and many predicted that it would catalyze sweeping change and end a decade of market deregulation.
That didn't happen.
As the months have passed, the most dramatic prescriptions for market reform have been discarded in favor of modest refinements that most observers applaud but many consider only a partial cure. Proposals for a regulatory restructuring and for curbs on the new high-tech trading strategies have languished as public alarm over the crash faded and as industry interests and key regulators mobilized to block change.
The debate over reform thus closed in a stunning victory for the ascendant interests of the investment world: the Chicago futures markets and the Wall Street firms that have uncorked cash gushers in the past decade with the new short-term trading strategies popularly known as program trading. On the defensive in the panicked aftermath of the crash, the industry's vibrant new wing has now established itself more firmly than ever and cleared the way for the similar trading innovations that are no doubt to come.
"No matter what we might hope for, the genie is now out of the bottle," says A. A. Sommer, a former member of the Securities and Exchange Commission who advocated tighter regulation of the trading practices that have been accused of destabilizing the markets.
The losers in the reform battle are the old-line Wall Street firms that make much of their money the old-fashioned way, by selling stock to individual clients. These so-called retail brokerages have long been unsettled by the new trading techniques, which they believe create volatility that frightens their clients and interfere with the market's primary function of enabling corporations to raise money by selling stock.
Had Many Problems
Executives of these firms today speak bitterly of the reform debate and warn that investors' painful absence from the market will continue unless more dramatic action is taken. "The changes we've seen are largely of a cosmetic and PR nature," says George Ball, chairman of Prudential-Bache Securities. "Greed has been the industry's primary motivator."
But if the general clamor for reform has subsided, it was strong indeed last October. Investors couldn't get through on the telephone to their brokers, traders couldn't get their orders executed, computers jammed, the exchanges sometimes didn't seem to be working together.
At the New York Stock Exchange and in the over-the-counter market, the functionaries charged with keeping trading going were accused of pulling back to avoid having to buy more and more stock. As a half-trillion dollars in paper losses piled up, the flow of information on the debts and assets of investors bogged down, and some lenders hesitated to extend further credit.
To address those problems, the exchanges and over-the-counter market began improvements immediately after the crash. They have increased the capacity of their computers to process trades, taken steps to see that there are enough buyers and sellers during a crash, and increased automation of the trading systems that became gummed up in October.
The New York Stock Exchange has sharply increased the amount of money and stock that must be held in reserve by specialists, the traders designated to supervise and participate in buying and selling of individual stocks. It has expanded its computer capacity and says it can now handle daily volume of 600 million shares almost as easily as it used to handle 200 million shares.
The difficulties faced by small investors in the over-the-counter markets during the crash will live long in Wall Street legend. Central among them was the withdrawal from trading of many OTC market makers, the dealers who are supposed to keep the market alive by buying and selling when others won't.
Threat of Suspension
In the crash, some market makers disconnected their phones to avoid having to buy the public's stock, while others disabled their links to the automatic trading system by entering incorrect price quotes.
The largest over-the-counter trading organization, the National Assn. of Securities Dealers, has taken several steps to keep market makers trading during a crisis. Market makers who withdraw from trading will now be suspended from the market for 20 days, compared to a former two-day suspension. And market makers who want to handle some of the most popular OTC stocks--those in the 2,500-stock National Market System--must agree to be hooked up to the NASD system that automatically carries out trades. The rule is intended to prevent them from ducking small orders for such stocks called in by telephone.