How those in trenches would avoid a rerun of Oct. 19
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Perrin Long, Lipper Analytical Services. ``Nothing'' should be done to prevent another Black Monday, says this veteran observer of Wall Street. ``The 500-point drop is one of the best things that ever happened to us,'' he says, ``because it wakes people up to the fact that we've got to do something about our trade and budget deficits.''Skip to next paragraph
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Stephen Goodale, individual investor. This semi-retired businessman from Ocean Ridge, Fla. echoes many (including the Brady Commission) in calling for uniform margin requirements in trading futures, options, and stock indexes.
Investors must pay at least 50 cents for every dollar of stock they buy, or a 50 percent margin. However, investors can still buy on, say, a 20 percent margin in the futures and other risky markets.
On Black Monday, ``You had so many sellers - and they were leveraged sellers'' involved with futures and index trading, Mr. Goodale observes. ``They had to sell when the margin calls went out, and that exacerbated the selling.''
John Markese, American Association of Individual Investors. Mr. Markese, the association's director of research in Chicago, says something should be done to reduce the ``wild discrepencies'' between stock prices and the prices of stock index futures.
Generally, the prices of stock index futures and the underlying stocks track pretty closely. But on Black Monday, the prices of the futures were falling faster than the stocks. Logically, arbitrageurs would step in and buy futures (they were a better bargain). They would sell stocks ``short'' - that is, sell stocks they don't really own, and agree to buy them later at a specified price.
That way, the price of the futures would rise (remember, the ``arbs'' were buying them) and the price of stocks would fall (arbs were selling them) until the two came into line.
However, arbs could not do that. Under a post-1929 law, stocks cannot be sold short in a falling market; investors must wait for an uptick. That meant stocks and futures got even more out of line, accelerating the downward spiral.
Markese's solution, which he notes is controversial: ``I'd take off the downtick rule on stocks.''
Sen. Donald Riegle (D) of Michigan. If there ever was a doubt that stock markets have gone global, Oct. 19 put that to rest. In the following days, one market after another - New York, London, Tokyo, Sydney - spurred each other to record losses.
Given this cascading effect, Senator Riegle, who heads the Subcommittee on Securities, would like to see ``an international SEC.'' It would set up uniform standards on things like margin requirements, reporting requirements, and accounting procedures.
He concedes that foreign markets, which compete against each other, would balk at such coordination. But eventually, he says, ``we've got to have a structure that works in the whole rather than just through the various separate pieces.''
`Circuit breakers' and other Brady recommendations
When Nicholas Brady strolled into the White House on Friday, all of Wall Street was watching him. After all, the stock market's fate could hinge on what Mr. Brady and his commission said in their report.
The commission concluded that program trading was a major culprit in the Dow's 508-point drop on Oct. 19. To prevent a repeat performance, the commission recommended:
Creating a ``circuit breaker'' mechanism to halt trading of stocks and limit price swings of futures if the selling pressure gets too intense. Brady backed away from definitively suggesting there be limits to price changes in stocks, as had been rumored.
Empowering one body, such as the Federal Reserve, to oversee both the stocks and the futures markets. Currently, the Securities and Exchange Commission (SEC) regulates the stock and bond markets and the Commodities Futures Trading Commission (CFTC) regulates futures.
Making uniform margin (down payment) requirements to trade all types of financial instruments. Today, an investor buy stocks if he pays for half in cash; if he wants to buy riskier investments like commodities, however, he only has to put down, say, 20 percent of the investment in cash and borrow the other 80 percent.
Creating a unified system to clear and settle trades.
The Brady report is the third in a series of reports on Black Monday. The Chicago Mercantile Exchange and the New York Stock Exchange issued their analyses in December. In the next month, the SEC, CFTC, and General Accounting Office will come out with reports of their own. In late January, the House will hold hearings on the market, as will the Senate in early February.