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Market Savvy

NYSE Looks to Loosen Dow Trading 'Collar'

Investing: In reaction to regulators' pressure, index would have to change 2% to curb computer-driven 'index arbitrage.'

November 06, 1998| From Times Staff and Wire Reports

After years of criticism, the New York Stock Exchange on Thursday proposed loosening its "collar" that now restricts certain computer-driven trades when the Dow Jones industrial average moves more than 50 points.

Under the NYSE's new plan, the Dow index would have to rise or fall 2%--about 178 points, at current market levels--before curbs on so-called program trading would kick in.

The world's biggest stock market is bowing to pressure from regulators, who have long argued that the 50-point collar, introduced in 1990 to temper volatility, was too restrictive--given how the Dow has soared in value.

At the Dow's year-end 1990 close of 2,633, 50 points was a 1.9% move. Today, a 50-point move represents a mere 0.6%.

The curbs exclusively affect "index arbitrage"--such as when institutional investors make large, fast-paced trades to exploit the price differences between NYSE-listed blue-chip stocks and the Chicago-traded stock-index futures based on those stocks.

The curbs effectively keep those investors from "piling on" and magnifying a market move.

Securities and Exchange Commission Chairman Arthur Levitt, whose agency must still approve the NYSE proposal, was supportive. "I think that's the way to go," he told Reuters.

But Wall Street's reaction was a stifled yawn. The action had been long expected, and many securities pros felt that the collars haven't been a major factor in trading.

Christopher Low, chief economist at First Tennessee Capital Markets, said loosening of the collars might slightly increase intraday stock volatility, but that isn't necessarily a bad thing.

Low believes the collars can be a calming influence in shaky markets, but "right now, they're standing in the way of even normal volatility."

The collars have been triggered 313 times so far this year--versus just 29 times in all of 1995 and 16 times in 1992.

Lehman Bros. investment strategist Jeffrey M. Applegate said the Big Board's action "doesn't seem to mean a lot one way or another." He noted that even with the 50-point collar market volatility has recently been extraordinarily high.

"At the end of the day, the market's going to go where the fundamentals are going to take it," regardless of opportunistic short-term trading along the way, Applegate said.

Federal Reserve Board Chairman Alan Greenspan, long a critic of the NYSE collars and other trading impediments, returned to the subject again Thursday in a speech to the Securities Industry Assn.

The central bank chief said the collars hamper market efficiency--that is, the ability of buyers and sellers to come together at the appropriate price.

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