DANGER OF ARBITRAGE TRADING DOWNPLAYED
Stock index-related arbitrage
trading did not spark the dramatic drop in the U.S. stock
market last September, nor is a free-fall in stocks and futures
prices due to arbitrage trading a likelihood, a top official
with the Securities and Exchange Commission, SEC, said.
    Richard Ketchum, director of SEC's division of market
regulation, told the Futures Industry Association that a
commission study of the circumstances surrounding the plunge in
the Dow Jones Industrial Average last September 11-12 shows
stock index-related arbitrage trading those days was
substantial but did not set off the price fluctuations.
    "While index-related arbitrage trading was a very
substantial part of the trading that day, it was by no means
the predominant part," Ketchum said.
    He said the study would be released next week.
    Index-related arbitrage relates to efforts, primarily by
institutional investors, to profit from price differentials by
shifting funds between stock index futures and their underlying
stocks.
    Some commodity exchange officials fear federal regulators
or Congress might move to restrict trading of stock index
futures in an effort to curb stock price volatility.
    Ketchum said the slide in stock prices was the result of a
"fundamental change in investors' perceptions of economic
conditions," triggered by "incorrect rumors" that West Germany
was set to cut its discount rate.
    The SEC study indicated the seven firms that accounted for
most of the arbitrage trading those days made 127 program
trades on September 11 and 117 trades September 12, accounting
for only 17.5 pct of the "sell side of the New York Stock
Exchange's volume," Ketchum said.
    He also said there was virtually no options index-related
arbitrage activity those days.
    Ketchum called "triple witching days" -- the Fridays each
quarter when stock index futures and options and opions on
individual stocks expire simultaneously - a "relatively minor,
overdone question" that has "relatively easy solutions."
    Moreover, "futures do not appear to have an impact on
long-term or probably even daily volatility," he said.
    Finally, Ketchum said a free-fall in stocks and futures
prices driven by program sell-offs of stock index futures and
individual stocks was unlikely.
    "We believe that the amount of money now available to come
in on the other side of the market by institutions make it
unlikely that that kind of snowballing effect would happen," he
said.
    But he said federal regulators could not discard the
possibility and would continue to be concerned by the issue.
 Reuter
