Program Traders Defend Practice


THE rising tide of protest against program trading on Wall Street - now encompassing brokerage houses, academics, individual investors, and members of Congress - has stunned program traders by its very momentum. But proponents of computerized trading insist that when the dust finally settles - as also occurred back in 1987, following that year's stock market crash - program trading will remain largely intact.

``All of the evidence from 1987 down to today, including the Brady Commission Report [on the stock market crash of 1987] exonerates program trading from somehow producing excessive market volatility or hurting the `small investor,''' says James L. Carder, president of Westridge Capital Management.

Mr. Carder, whose Los Angeles-based firm manages $300 million in assets, is an active participant in the most controversial form of program trading, index arbitrage. That is a process in which stocks and stock futures are bought and sold to take advantage of price discrepancies between markets, including the equities and the futures market.

Carder notes that by using index arbitrage, his firm consistently turns in returns well ahead of market averages.

Criticism is `witch hunt'

``I never thought I would see the opposition [to arbitrage] become this intense,'' Carder says. He insists that the criticism against program trading adds up to a new form of economic ``witch hunt.'' Carder does not believe that Congress will ban program trading, especially index arbitrage. To do that, he says, would be ``to abolish the futures market'' in equities.

``All of this business about a `class struggle' [with program traders somehow representing the well-connected and affluent versus the smaller investor] is all garbage,'' asserts J. Thomas Allen, president of Advanced Investment Management, a Pittsburgh firm managing some $1 billion in institutional assets. Mr. Allen's firm also engages in program trading, which, he avers, benefits thousands of individual investors through company pension funds or other institutional portfolios.

Clearly, firms engaging in program trading are increasingly finding their backs against the wall, following the 190-point stock market decline on Oct. 13. Critics call it ``short-term trading,'' not based on a real regard for the underlying fundamentals of the companies whose stocks are bought and sold. The stocks are invariably part of a market basket of many stocks.

Exchange imposes curbs

A number of leading investment houses have now said that they will not engage in the practice for their own accounts - although they will continue to do so for their clients. Meantime, the New York Stock Exchange has introduced a number of short-term steps designed to curb computerized programming, such as delaying program trades for 15 minutes when the Dow Jones industrial average tumbles 30 points, and for a half-hour when the Dow tumbles 75 points.

Finally, Congress is now pursuing its own inquiry into program trading. No final legislative action is expected soon.

Program traders insist that the criticism against their system stems from misinformation. ``Program trading is advantageous in that it actually adds liquidity to the trading market,'' Carder says. It lowers transaction costs on the buying and selling of stocks, he says. And it allows ``customers'' to make a profit on price differences between different markets. Carder also argues that the linkage between the equities and futures market helps to keep the underlying value of a stock realistic, since there is a constant movement toward equilibrium between the various markets.

Program trading has become an increasingly important component of stock trading. It represented 13.8 percent of the overall trading on the NYSE during September. But Allen insists that there is no proven linkage between program trading and excessive volatility.

The early 1970s, for example, were marked by high volatility, yet program and futures trading as it exists today was nonexistent. Abolishing program trading, he says, would be to ``move backward in time.''

The clear beneficiaries of such a restriction, he says, would be the traditional stock exchanges and their trading specialists, who would be in effect saying that ``we shouldn't have competitive markets.''

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