NYSE Expected to Phase Out Its Rule to Curb Program Trading

NEW YORK — The New York Stock Exchange is expected to soon phase out a rule that represented one of its major efforts to curb market volatility in the aftermath of October’s crash.

Industry executives say a majority on the exchange’s board of directors now favor elimination of the so-called collar intended to curtail a form of computer-driven program trading known as index arbitrage. Index arbitrage, blamed by some for increasing the upheaval in the stock market, involves high-speed trading of huge blocks of stocks and stock index futures to profit from price disparities in different markets.

The program-trading limit, while the most visible of post-October market reforms, has from the start been considered ineffective by some or even a destabilizing factor by others. “There’s no cheering squad for the collar,” said Michael Creem, one of the New York Stock Exchange traders called specialists and a former exchange board member.

The expected phase-out of the rule is another sign of the slow pace of the post-October stock market reforms, which have lost momentum as the market has strengthened and the investment world and its regulators have argued over how best to prevent another crash.

Market professionals close to the exchange said they expect that its board, which meets today, will allow the rule to lapse in October rather than ask for an extension from the Securities and Exchange Commission. The collar was adopted for a six-month trial period in April, and the exchange would have to request an extension soon for the SEC to have time to consider an extension. The rule bars New York Stock Exchange firms from using the Big Board’s automated order system to execute index arbitrage if the Dow Jones industrial index moves 50 points within a day.

As it discards the collar, the board is expected to adopt a new rule intended to give small investors a trading advantage on days of heavy stock volume.

Under the still-incomplete proposal, the small orders of individual investors would be moved ahead through the Big Board’s electronic order routing system before larger orders of institutional investors on days of volatile trading.

Under one possible version of this rule, orders of 1,000 shares or less would be given priority if the Dow has moved 25 points in a day. Such a change is intended to increase the confidence of individual investors, who were battered in the October debacle when their sell orders were slowed behind the flood of orders from large institutions.

Had Limited Use

But critics are already saying that the rule may be largely a public relations gesture, since it would speed up processing of individual shares by only several seconds.

An NYSE spokesman said the exchange would not comment on proposals that are pending before the board.

Critics said the collar had only limited use, since the big traders could have their index arbitrage orders executed manually by floor brokers once the order system was unhooked. With such execution, trades are slowed by only a matter of a few minutes.

Some investment professionals reacted with frustration to news of the expected end of the collar, noting how few major reforms have been instituted since October.

The exchanges and over-the-counter markets have instituted several changes since the crash. Among them, the New York and American stock exchanges have both increased their capacity to handle orders; the Big Board and the Chicago Mercantile Exchange have sought to improve communications, and the Chicago Merc has increased margins on stock index futures.

More Study Needed

But many other issues remain unresolved. The SEC and the Commodity Futures Trading Commission vehemently disagree over who should regulate the stock index futures market, which is so closely tied to the stock market, for example. None of the principal findings of the President’s study panel on the crash, the so-called Brady Commission, have been adopted.

“I’m not sure the collar was a terribly effective device, but there is still a need for us to find out what has been happening in our markets and do something about it,” said Arthur Levitt Jr., chairman of the American Stock Exchange.

Levitt has pushed for formation of a new study group, possibly to be headed by former Federal Reserve Board Chairman Paul A. Volcker.

Many on Wall Street and in Washington believe that no action will be taken until at least next year, after a new Administration begins.