1 While Wall Street is retreating from computer-driven program trading, big institutional investors are likely to continue these strategies at full blast, further roiling the stock market, trading executives say.
2 Bowing to a mounting public outcry, three more major securities firms -- Bear, Stearns & Co. Inc., Morgan Stanley & Co. and Oppenheimer & Co. -- announced Friday they would suspend stock-index arbitrage trading for their own accounts.
3 PaineWebber Group Inc. announced a pullback on Thursday from stock-index arbitrage, a controversial program-trading strategy blamed by many investors for encouraging big stock-market swings.
4 Though the trading halts are offered as a sign of concern about recent stock market volatility, most Wall Street firms remain open to handle program trading for customers.
5 Trading executives privately say that huge stock-index funds, which dwarf Wall Street firms in terms of the size of their program trades, will continue to launch big programs through the stock market.
6 Wells Fargo Investment Advisers, Bankers Trust Co. and Mellon Capital Management are among the top stock-index arbitrage clients of Wall Street, trading executives say.
7 These huge stock-index funds build portfolios that match the S&P 500 stock index or other stock indexes, and frequently swap between stocks and futures to capture profits. 'They will do it every chance they get,' said one program-trading executive.
8 Consequently, abrupt swings in the stock market are not likely to disappear anytime soon, they say.
9 In fact, without Wall Street firms trading for their own accounts, the stock-index arbitrage trading opportunities for the big funds may be all the more abundant. 'More customers may come to us now,' said James Cayne, president of Bear Stearns Cos.
10 Executives who manage these funds see the current debate over program trading as a repeat of the concern expressed after the 1987 crash.
11 They noted that studies completed after the 1987 crash exonerated program trading as a source of volatility. 'The issues that are (now) being raised, in classic anti-intellectual fashion, fly in the face of a number of post-crash studies,' said Fred Grauer, chairman of Wells Fargo Investment Advisers.
12 A Bankers Trust spokesman said that the company's investment arm uses stock-index arbitrage to enhance investors' returns.
13 Officials at Mellon Capital were unavailable for comment.
14 Stock-index funds have grown in popularity over the past decade as pension funds and other institutional investors have sought a low-cost way to match the performance of the stock market as a whole.
15 Many money managers who trade stock actively have trouble consistently matching the S&P-500's returns.
16 Some stock-index funds are huge.
17 Wells Fargo Investment Advisers, for example, managed $25 billion in stock investments tracking the S&P 500 at the end of June, according to Standard & Poor's Corp. Mr. Grauer said $2 billion of that is used in active index arbitrage.
18 Stock-index funds frequently use the futures markets as a hedging tool, but that is a far less aggressive strategy than stock-index arbitrage, in which traders buy and sell big blocks of stocks with offsetting trades in stock-index futures to profit from price differences.
19 The 190-point plunge in the stock market Oct. 13 has heightened concerns about volatility.
20 And while signs of an economic slowdown, softer corporate earnings and troubles with takeover financing all have contributed to the stock market's recent weakness, many investors rushed to blame program trading for aggravating market swings.
21 The Wall Street firms' pullback followed their recent blacklisting by several institutional investors.
22 Last Tuesday, Kemper Corp. 's Kemper Financial Services Inc. unit said it would no longer trade with firms committed to stock-index arbitrage, including the three that later suspended stock-index arbitrage trading on Friday.
23 Phoenix Mutual Life Insurance Co. and Founders Asset Management Inc. also cut off brokerage firms that engage in program trading.
24 Though it is still doing stock-index arbitrage trades for customers, Morgan Stanley's trading halt for its own account is likely to shake up firms such as Kidder, Peabody & Co. that still do such trades for their own account.
25 Morgan Stanley has consistently been one of the top stock-index arbitrage traders in recent months.
26 Indeed, Morgan Stanley's president, Richard B. Fisher, said the firm is putting up money to form a group of regulators, investors and investment banks to find out if stock-index arbitrage artificially induces stock-market volatility.
27 'We have to clear up these issues and find out what is present that is creating artificial volatility,' Mr. Fisher said. 'There is no question that investor confidence (in the stock market) is critical.'
28 Joining the call for some kind of study or regulatory action, Merrill Lynch & Co. recommended program-trading reforms late Friday, including higher margins on stock-index futures and greater regulatory coordination.
29 Separately, Mr. Cayne of Bear Stearns said his firm is working with regulators to balance margin requirements to 'enhance stabilization.' Margin rules determine the minimum amount of cash an investor must put up when buying a security.
30 Current rules permit investors to put up less cash for futures than for stocks.
31 Some observers say that different rules governing stock and futures markets are partly responsible for volatility.
32 These rules, they say, permit faster and cheaper trading in futures than in stocks, which frequently knocks the two markets out of line.
33 Stock-index arbitrage, because it sells the more 'expensive' market and buys the 'cheaper' one, attempts to reestablish the link between the stock and futures markets, and the adjustments are often abrupt.
34 But unequal trading rules allow the futures market to trade differently from stocks, which invites frequent bouts of stock-index arbitrage in the first place.
35 'There has to be better coordination on a regulatory basis,' said Christopher Pedersen, director of trading at Twenty-First Securities Corp. 'One agency should have the authority over all equity products.'

While Wall Street is retreating from computer - driven program trading , big institutional investors are likely to continue these strategies at full blast , further roiling the stock market , trading executives say .
retreating from computer - driven program trading ,
Why was Wall Street hesitant to use computers to trade?