Big Board's leader looks at - leadership

Stock market crashes, says John J. Phelan Jr., carefully probing his luncheon salad with a fork, ``are rare occasions.'' As chairman of the New York Stock Exchange, the soft-spoken Mr. Phelan can be expected to do his part to ensure that such occasions stay rare. Phelan says that the Big Board is exploring a possible series of rules to control trading during periods of extreme market volatility, as happened last Oct. 19, when the market plunged 508 points.

Under the 50-point ``collar'' imposed earlier this year, the exchange has set curbs on index arbitrage program trading when the Dow Jones industrial average moves up or down 50 points in a trading day. Should the Big Board expand the collar? Whatever is decided, the key, says Phelan, speaking to a few reporters at a recent lunch at the exchange, is to establish defined ``ground rules.'' If the limits are hit, he says - and the trading rules go into place - ``people won't think the world has fallen apart.''

Phelan's observations draw attention to a debate increasingly heard within United States political circles after last year's plunge - and in light of the current sluggishness in equities markets. Worries over the sliding dollar, inflation, and slightly higher interest rates have resurfaced. Last week, the Dow Jones industrials closed up 9.11 points, at 1,988.06.

Now at issue: leadership. The October market dive, so this argument goes, came about in part because of a lack of coordination and effective leadership within and between Washington and the financial community. Stronger action, according to this view, is needed from Washington. But to what extent, in fact, is leadership necessary to restore investor confidence and prompt a resurgence for the market?

Phelan, for his part, recognizes the value of alert oversight, following publication of the Brady Commission report. That report found the stock, futures, and options markets to be invariably linked together and called for a new super-regulatory agency, as well as development of ``circuit breakers'' to prevent a repeat of Oct. 19. Yet, Phelan prefers a carefully crafted legislative approach that, at the least, brings together all the main ``players'' in the regulatory arena - rather than having Congress race to judgment on a bill.

Merely looking at last October to decide whether to impose circuit breakers might not be enough, he maintains. The next blow on the market, if there were to be one, he says, might well come from some element not even now recognized.

``There were some mechanisms that broke down on Oct. 19 and Oct. 20,'' says Marshall Blume, professor of finance at the Wharton School. ``It's clear that the futures market, for example, was regulated by one group, the stock market by another.''

Thus, Professor Blume says, legislating some type of overall coordination of these markets makes sense. But at the same time, he says, it is important to know with greater certainty about precisely what caused the Oct. 19 drop. ``There is no general agreement about what happened,'' he says. `` We know lots of program trading took place concurrently with the drop-off in the market. But we haven't yet established with certainty that the trading caused the drop-off.''

``The market is very suspicious about political leadership, because it is self-serving,'' says Larry Wachtel, an analyst with Prudential-Bache Securities Inc. in New York.

In general terms, ``Wall Street,'' says Mr. Wachtel, sees Washington as taking actions essentially for ``political reasons.'' The financial community, he says, ``responds after the fact,'' weighing ``actions'' more than ``words'' or intentions.

``The basics that the market watches,'' says Richard Wholey, a brokerage analyst with Wayne Hummer & Co., Chicago, are such factors as ``company earnings, the economic outlook, company management, trends in specific industries.''

``Whenever the market gets too sidetracked,'' it loses the larger picture, Mr. Wholey says.

For his part, Wholey particularly likes the leadership style of Mr. Phelan at the Big Board.

Whether Washington will buy the tougher self-restraint on the part of the markets is another matter. Several plans are being broached in Congress that would tighten federal controls over securities markets.

Wholey, however, says that legislation must be carefully written, lest it do more damage than good. And, he says, there is already a greater awareness of the risks in playing the market. ``A lot of the weaker players have been scared off,'' he says. ``But doing so has increased the overall potential return. People had better understand,'' he adds, ``that the market is a risky place.''

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