Exchanges Ignore Brady Plea For Intermarket Coordination

The presidential task force led by investment banker Nicholas F. Brady concluded that the equities, options and futures market are one market, but the message has fallen on deaf ears.

In the two months since the Brady report was released, exchanges have continued to make decisions without considering their impact on related markets.

The New York Stock Exchange's ban on its Designated Order Turnaround system for stock index arbitrage if the Dow Jones Industrial Average moves 50 points or more in a day is a case in point.

"What's good for the NYSE isn't necessarily good for the rest of the world," says Thomas Russo, partner in the law firm Cadwalader, Wickersham and Taft.

The "circuit breakers" recommended by the Brady report and other post-crash studies will do more harm than good unless they are implemented on an intermarket basis. "Why would you put a circuit breaker in one market and not in the other?" asked Russo at a "Real- Time Risk Management" conference sponsored by Waters Information Services, publishers of TST.

At the Futures Industry Association's recent convention in Boca Raton, Fla., Chicago Board Options Exchange Chairman Alger "Duke" Chapman and others said restrictions on DOT and price limits on stock index futures have left the markets more fragmented and vulnerable than they were before Black Monday.

"Exchanges did what made sense within their own framework," says Chapman. "We all went about our own business. But we need coordinated action."

Lack of coordination is a familiar topic to the leadership of the FIA. The elected chairman of the industry trade group, Jack H. Lehman III, is head of futures trading at Shearson Lehman Hutton Inc. Shearson ran ads during the Super Bowl announcing that it would no longer do program trading for its own account, which had never been a big business for the firm to begin with.

Some FIA members suggested that it might not be a good idea to have a Shearson employee representing the futures industry's interests to Congress and regulatory agencies.

At the FIA convention, the only time representatives of the equities, options and futures markets were on the same dais was for a discussion on clearinghouse coordination.

Although Chapman of the CBOE and Securities and Exchange Commissioner Edward H. Fleischman participated in a session on the aftermath of October 19, no one was there to represent the New York Stock Exchange.

Both NYSE Chairman and Chief Executive John Phelan and Michael Creem, a Big Board specialist and chairman of the New York Futures Exchange, were invited to speak on the Black Monday panel.

Evidently the FIA believed Phelan and Creem were coming since name cards were printed up for them. Some wags in the audience suggested that the cards be placed in front of empty chairs so the stock market could be tried in absentia.

An NYSE spokeswoman notes that the Big Board's highest ranking futures executive -- Lewis Horowitz, president of the New York Futures Exchange, the NYSE's futures subsidiary -- attended the FIA convention.

While experts assembled by the FIA applauded efforts to expand market capacity, they warned that this is not enough to prevent another October 19.

Robert R. Glauber, executive director of the presidential commission on market mechanisms (the Brady commission), told the FIA that private-sector efforts to reform the market "have not been encouraging."

The steps taken by individual exchanges could have the effect of reducing arbitrage and de-linking stock index futures and their underlying equities, instead of bringing the markets closer together, he says.

Glauber noted that many people seemed disappointed that the Brady report "didn't suggest the elimination of derivative instruments, computers and TV screens."

What is needed instead, he says, are well-designed circuit breakers that are outlined in advance and that extend across all markets. Coordinated trading halts would would give specialists the opportunity to attract the contra side by advertising market and limit orders, Glauber says.

"There would be no reason to go home after limits were hit," he says.

Fleischman told the FIA that prohibitions against trading most listed equities and all futures contracts away from the exchange floor should be re-examined along with bans on information-sharing, which effectively prevent futures traders from publicizing orders outside the pit.

The future envisioned by Glauber, Fleischman and others calls for technology to play an important role by allowing market participants to more efficiently communicate their intentions to one another.

Even when orders are executed on an exchange floor, computer screens will provide a critical link between the floor and the institutional investors who dominate trading.

After the market structure is fine-tuned, the next challenge will be to tie together the various exchange order-routing systems and the private market data networks, electronic bulletin boards and automatic execution facilities.