NEW YORK, NOV. 23 -- A single California bank actively involved in the controversial program trading strategy known as portfolio insurance was responsible for more than 10 percent of the stock index futures traded by public customers at the Chicago Mercantile Exchange on Oct. 19, sources said today.
San Francisco-based Wells Fargo & Co., through an investment advisory unit, sold about $2.1 billion in stock index futures on Black Monday as part of a program trading service it provides to clients, according to sources familiar with information the bank has provided to a presidential commission studying last month's stock market panic.
Heavy selling of stock index futures in Chicago preceded panic in the New York stock markets on that day, according to some market participants. A presidential commission headed by investment banker Nicholas Brady is studying, among other things, the role of portfolio insurance and other program trading strategies in the market collapse.
Sources said that Wells Fargo has told the Brady commission it sold about 14,000 stock index futures contracts on Black Monday, mostly Standard & Poor's 500 stock index futures. Each contract had a market value of about $150,000 at the beginning of trading that day.
Wells Fargo declined to comment. "We have a fiduciary obligation not to disclose publicly our activity on behalf of our clients," Fred Grauer, chairman of Wells Fargo Investment Advisers, said through a spokeswoman. "Anything that was submitted to the Brady Commission was submitted in confidence."
"I have not seen those numbers yet," said Robert Glauber, the Harvard Business School professor who is executive director of the Brady Commission staff. "That is certainly data we are going to get."
Wells Fargo is a leading provider of portfolio insurance services to stock fund managers. Its service, which has only been recently developed, attempts to protect owners of large amounts of stock from losses in a falling stock market. When the market begins to drop, insurers such as Wells Fargo sell stock index futures in Chicago, hoping that profits on the futures will make up for loss of value in the stock market.
Regulators are studying whether wide use of portfolio insurance on Oct. 19 accelerated the stock market's collapse that day. Some market participants have said that massive selling of stock index futures because of portfolio insurance programs overburdened the Chicago Merc and forced prices down dramatically, frightening investors and contributing to panic stock selling in New York.
In its own defense, the Merc has argued that the heavy futures selling that day -- whether generated by portfolio insurance programs or for other reasons -- provided an important outlet for pent-up selling pressure. The Merc has pointed to delays in stock trading at the New York Stock Exchange as a contributing factor in the panic.
The large number of S&P 500 contracts sold by Wells Fargo on Black Monday as part of its portfolio insurance activities indicates that the insurance strategy was a substantial factor in the futures market.
Trading in S&P 500 futures totaled 162,000 contracts on Oct. 19, a record, according to a Merc spokesman. Of that amount, 89,000 contracts were traded by public customers, including Wells Fargo. That would indicate, based on information the bank has provided the Brady Commission, that Wells Fargo was responsible for more than 10 percent of the trades by public customers. (Some of the Wells Fargo trades may have been executed on smaller futures exchanges.)
The rest of the futures trades at the Merc on Black Monday were between member firms and by large investment firms that traded for their own accounts, sometimes as part of computer trading strategies separate from portfolio insurance.
The Merc spokesman estimated that of the 89,000 contracts traded on Oct. 19 by public customers, about 50,000 were executed as part of computer-assisted portfolio insurance strategies. But the spokesman said the Merc's estimate was based on its own trading records, not information provided by insurers.
Wells Fargo is one of the three largest providers of portfolio insurance services, according to a survey published in the September issue of Intermarket Magazine, a Chicago-based trade journal.