INDEX TRADING NOT TO BLAME FOR WALL STREET FALL
A report by the U.S. Securities and
Exchange Commission (SEC) concluded that index trading was not
to blame for the two-day stock market drop that occurred Sept.
11-12, 1986
    The report, made public today, concluded that index trading
magnified but was not the cause of last fall's two-day
120-point drop in the Dow Jones Industrial Index.
    The commission staff said it planned to continue to closely
monitor developments in index-related trading but planned no
immediate regulatory action as a result of the precipitous
stock market decline.
    "The magnitude of the September decline was a result of
changes in investors' perceptions of fundamental economic
conditions, rather than artifical forces arising from
index-related trading strategies," the report said.
    "Nevertheless, index-related futures trading was
instrumental in the rapid transmission of these changed
investor perceptions to individual stock prices, and may have
condensed the time period in which the decline occurred."
    The SEC staff concluded its study "does not provide an
independent basis to conclude that radical regulatory or
structural changes are necessary at this time."
    The report said "the dramatic growth in the size and
institutional use of index products requires continued careful
analysis of the potential for disruption of the stock market as
well as manipulative or other inappropriate trading in the
index products and their component stocks."
    It said there "may be merit" to requiring additional
reporting and record keeping procedures for index-related
trading. But it added that the SEC staff has not yet considered
the costs and benefits of the various alternatives.
    The report does not deal with a second precipitous dip in
the market which occurred Jan. 23.
    On that day, the Dow Jones Industrial Average dropped 115
points in little more than an hour.
    The SEC said its staff was still analyzing the underlying
causes of that price decline and had not yet made findings.
    The SEC study was made after a number of investors, news
reports and other analysts blamed the Sept. 11-12 drop on
so-called "program trading," in which computers rapidly execute
complex trading strategies designed to profit from minute
changes in the relationship between the price of stock index
futures and the stocks that make up the index.
    The investors and analysts complained that such rapid
movements in the stock market would drive small investors out
of the market and possible even lead to a stock market crash.
    But the SEC report said the possibility of a market
collapse was "remote."
    It said it believed any rapid stock price decline "likely"
would eventually be reversed by renewed buying as prices
reached far lower levels.
    It also argued that index futures and options are important
to traders who use them to hedge their market positions and
lessen risk exposure.
    "While a 'cascade effect' may be possible as a result of
index-related trading, it did not ocur on Sept. 11 and 12," the
report concluded.
 Reuter
