A New York Stock Exchange rule imposing limits on computer program trading of stocks if one-day changes in the market get too large had its first real test the past week when the Dow Jones stock average fell more than 101 points.
The results appear to be mixed. The limitation clearly didn't stop the the fifth worst daily decline on Wall Street's history, but at the same time, it may have kept it from being worse.The fall in price the worst since the history-making drops last September and October was caused by news that the U.S. trade deficit had grown much bigger in February than was expected. That, plus the subsequent decline of the dollar, brought on massive selling.
According to the rule imposed by the New York Stock Exchange about 10 weeks ago, so-called "index arbitrage program trading" by computer is suspended when the change in average stock prices exceeds 50 points.
In index arbitrage, brokers use computerized strategies involving simultaneous buying and selling of massive amounts of stocks in New York and stock-index futures in Chicago in order to profit from price disparities between different markets.
Such automatic trading and its impact on stock prices especially when prices are falling tend to discourage individuals and institutions from buying stocks. This may make any fall in the market even worse.
Do such artificial limits work? That's hard to say. They certainly didn't stop the slide in prices when they were imposed after the market fell 50 points on Thursday. It dropped another 51 points before trading closed for the day.
If nothing else is accomplished by the trading rule, a kind of self-regulation by the Stock Exchange, at least it should help keep Congress from imposing stricter limits of its own devising.
The rule does not end index arbitrage trading but merely makes it tougher to do. A few big brokerage firms have enough manpower to work such deals without high-speed computers. And it may simply force the market to look for more devious ways to accomplish the same thing hardly an improvement.
In general, artificial limits on stock market trading should be viewed with caution. They are an attempt to interfere with a free market and its decisions on how much stocks and commodities are worth. Yet if such rules don't try to control prices, but seek only to limit certain trading techniques, they may be acceptable.
It's too early to pass judgment on the new arbitrage rules. It may turn out that arbitrage trading is not the villain it has been painted by some. More experience is needed before the New York Stock Exchange can determine if such rules help or hinder the market. But if they don't help more than they seem to have done so far, they should be quickly abandoned.