The futures industry has endorsed putting daily limits on price changes of stock index futures contracts and is urging the presidential commission studying the stock market collapse to consider limiting price moves in the stock and options markets as well.
"The speed with which the stock market declined could have been significantly slowed if price limits had been in place," Futures Industry Association President John Damgard said in a letter to Nicholas Brady, chairman of the panel looking into the causes of the plunge and possible remedies.
Without accepting the charge that stock index futures accelerated the Oct. 19 drop, the industry spokesman said price limits "might have made an enormous difference in October with respect not to the value of the market, but rather how quickly it achieved its new level."
The FIA is the trade association and Washington lobbying institution for the commodity futures industry. In the last decade, the futures business has been transformed from a marketplace for farm products into an integral part of the money markets, trading contracts for future delivery of stocks, bonds, mortgages and other financial instruments.
One of the most successful new products that the Chicago commodity markets has created is stock index futures, which make it possible to bet on the overall direction of the stock market by purchasing contracts for future delivery of a theoretical basket of stocks.
The recommendation for daily price change limits covering all stocks, stock options and stock index futures puts the commodity traders in another conflict with the New York Stock Exchange. The stock exchange not only has opposed suggestions to limit stock prices moves, but also has blamed the futures markets for worsening the Oct. 19 drop.
Limiting daily price swings in stocks and related investments is one of several possibilities being considered by the Brady Commission. Also under study are raising the margin, or down payment, required on stock index futures; restricting computerized techniques known as program trading for buying and selling stocks and futures; and changing the way the government regulates the related markets.
As expected, the futures industry group said it is opposed to government regulation of futures margins and objects to merging the Securities and Exchange Commission, which regulates the stock market, with the Commodity Futures Trading Commission, the federal overseer of futures markets.
"The FIA believes that the current regulatory system with separate independent federal agencies for futures and securities works extremely well," Damgard said in his letter to Brady. Brady aides say they have ruled out merging the two agencies because of the strong opposition from the politically potent futures industry, but they insist that some changes are needed in the separate and often unequal regulation of stocks and stock index futures.
Putting daily price limits on stock index futures trading has become the commodity traders' preemptive answer to calls for new regulation of stock index futures. The Chicago Mercantile Exchange imposed emergency price limits on its S&P 500 futures contract shortly after the crash and since then has extended the limits indefinitely.
There have long been limits on daily price changes in agricultural commodities. When corn or wheat prices go up or down 5 cents a bushel, trading is halted for the day. Until now, the industry has consistently opposed limiting prices in stock index futures, arguing that unfettered markets are more efficient and that stock index futures prices must be free to reflect the unrestricted changes in the prices of stocks themselves.
The futures industry's new position is that "price limits operate as a 'natural' trading halt" that can provide "time for the market to decompress" without direct government intervention. Limiting stock index futures prices without restricting stock prices as well would only distort the relationship between the two markets, making it difficult to hedge risks in the stock market by trading futures, the industry group warned.
Critics of stock index futures say the idea of limiting prices in all markets is an intentionally unpalatable and impolitic proposal meant to assure that no limits are imposed on any markets -- especially index futures.