Wall Street is bracing for a June trading storm today that could send the stock market soaring, plummeting or, perhaps, nowhere at all.
Today is expiration day for investments in options and futures that are widely used by Wall Street's cash-rich players to profit from controversial computer-directed trading strategies.
Huge waves of selling or buying could be triggered as the closing hour approaches. Or, as some traders said, it could be "a nonevent."
A major move either up or down is likely to fuel new debate on whether computerized or program trading is good for the markets. Industry officials claim the influx of billions of dollars has created broader, deeper markets, while critics contend that the programs produce sharp fluctuations that drive out small investors.
Program trading primarily is used by the largest investors on Wall Street, such as pension funds and major brokerage houses. Their strategy involves both stocks and stock-index futures and is keyed to price disparities between the two markets. The trades often involve hundreds of different stocks and millions of dollars.
In program trading, investors look at the price differences between stocks and futures contracts. When the gap is large enough to produce a profit, they buy a $20 million or $30 million basket of stocks that matches the stocks in the Standard & Poor's 500 index. Simultaneously, they sell an equivalent value of futures contracts on the S&P 500. Whether the prices of stocks and futures rise or fall, the investors have locked in an almost riskless profit by the expiration date.
By the day that the futures contracts expire, program traders must close out their investments. Today, options on stocks, options on stock indexes and future contracts on stock indexes all expire simultaneously at 4 p.m. when the market closes -- a confluence of events quaintly called the "triple witching hour."
Watching today's trading will be the Securities and Exchange Commission and the Commodity Future Trading Commission, which recently asked their respective exchanges to study proposals to reduce market gyrations on expiration Fridays, which occur on the third Fridays of March, June, September and December.
The ideas include halting trading for 15 minutes near the end of the day to provide time to match buy and sell orders, using the opening prices instead of closing prices on expiration day to settle contracts and requiring traders to disclose their order flow. The SEC will sponsor a roundtable discussion July 9 on the problems of expiration Fridays.
Market watchers said they were finding it difficult to predict the direction of today's trading.
"Perhaps it's just the calm before the storm. And maybe there won't by any storm," said Gerry Kuschuk, senior vice president at Prudential-Bache. Kuschuk's market forecast was "neutral to slightly down."
Howard Brenner, senior executive vice president at Drexel Burnham Lambert said, "My guess is that it will probably be a nonevent."
John D. Connolly, senior vice president at Dean Witter, said that, based on the number of futures contracts outstanding, the current situation seems similar to the March expiration.
On March 21, the last triple close, the Dow Jones Industrial Average sank 35.68 points, with most of the drop coming in the last hour of trading. A year ago, the June expiration took the market up 24.75 points.
Of the last nine "triple" days, only two were up days, averaging 20.8-point gains. Seven were down days, averaging 12.4-point losses.
One major question is how much stock remains to be sold today by program traders. One knowlegeable trader estimated that only $200 million in stocks remains to be sold because many program trades were sold Monday, June 9, when the Dow dropped 45.75 points.
The market began to fall when pessimistic future traders dropped the price of the futures contracts on the S&P 500 stock index. That brought the price of the index and the price of the futures close enough to make it profitable for program traders to sell their stocks in advance of expiration day.
Traders said many of the existing programs would not be heard from today because their sponsors already have swapped S&P 500 June futures contracts for similar September contracts. The rollovers were made at times when it was attractive to do so on a yield basis.
The most dramatic forecast about today's trading came from R. Sheldon Johnson, who is in charge of equity index products at Morgan Stanley & Co.
Johnson said that index funds might buy $800 million worth of stock at the expiration hour. An index fund is created to mirror the performance of an index such as the S&P 500 and usually is operated by an organization that manages pension money. Index funds are growing in popularity because major indexes often outperform individual portfolio managers.