Officials of the Securities and Exchange Commission and major stock exchanges yesterday agreed that changing the time at which stock index options and futures contracts expire might reduce the huge swings in stock prices that often are set off by futures and options trading, securities industry sources said.
The SEC officials and exchange executives met to discuss ways to moderate the volatile moves that regularly happen on the so-called "triple-witching" days on the third Fridays of March, June, September and December, when options and futures contract based on stock indexes all mature at the same time.
The value of stock index futures and options now is determined at the close of trading on the stock exchanges. SEC staff members have suggested that setting the price of the contracts based on opening prices rather than closing prices might alleviate some of the last day price swings.
On expiration days, traders, especially big brokerage houses using computer-directed buying and selling programs, close out their positions in futures contracts and options based on stock indexes such as the Standard & Poor's 500. The millions of shares of stock that change hands, mainly in the final hour of trading, drive stock prices into gyrations.
The swings occur because the trading programs call for massive purchases or sales of stocks that underlie the indexes. When huge stock orders come to the market at once, imbalances between those wanting to buy and those wanting to sell usually develop, which causes wild swings in stock prices.
On March 21, the last triple-witching day, the Dow Jones Industrial Average fell 35 points in the final hour of trading, as trading programs directed the sales of many of the stocks that are used to compute the stock indexes.
The exchange officials agreed with the SEC that computing the index values on the opening prices of the stocks might eliminate many of the problems. But they said they are not convinced that the swings in prices are harmful to the markets or investors, as the SEC fears.
One securities industry official said that stock exchanges, such as the New York and American, have well-developed procedures for dealing with order imbalances that occur prior to the opening of trading -- including announcing that such imbalances exist in order to attract investors to that stock.
Order imbalances probably would occur even if the opening price is used, a securities industry official said, but by concentrating them at the opening bell exchanges might insure that trading is relatively normal for most of the day.