The decision by the New York Stock Exchange to consider a formal system of brief trading halts for stocks that move up or down sharply is the latest in a series of steps designed to bolster confidence in the battered securities markets and head off congressional reforms that Wall Street would view as undesirable.
Since the Dow Jones industrial averageplunged 508 points in one day last October, major exchanges based in Washington, Chicago and New York have been adopting new procedures to diminish the wild price swings that frighten small investors. They also have been adopting new systems to improve the treatment of individual investors, many of whom were misused during the market's historic plunge.
Relative to some of the possible reforms under discussion, none of the measures adopted thus far can be considered radical. But all of the exchange proposals, including the latest measure under consideration by the NYSE, could be presented as evidence at congressional hearings next month that the exchanges have responded to weaknesses exposed by the stock market crisis.
The NYSE proposal disclosed this week by Big Board chairman John J. Phelan Jr. would formalize a system of temporary trading halts whenever there is a significant imbalance in buy and sell orders. Under the existing system, traders on the NYSE floor -- known as specialists -- can ask that trading in individual stocks be temporarily halted whenever there is a significant imbalance in buy and sell orders from the public.
The specialist has responsibility for maintaining orderly trading in individual stocks by stepping in at crucial moments to buy when the public is selling or to sell when the public is buying. Whenever an extraordinarily large imbalance in buy and sell orders develops for any reason, the specialist may ask designated officials on the floor of the exchange to temporarily halt trading in a stock.
As news of the halt is disseminated, traders around the world are alerted to the unusual activity. The brief cooling-off period -- which typically lasts no longer than 30 minutes -- gives market professionals an opportunity to try to find out the cause of the unusual activity (it could be an announcement of lower than expected earnings or of a premium-priced takeover bid) and encourages them to place new buy and sell orders that may help to ease the order imbalance.
Under the NYSE proposal that is expected to be considered at a board meeting next month, this ad-hoc system would be replaced by automatic trading halts whenever a stock moves up or down in price by a fixed percentage, such as 30 percent. A spokeswoman for the exchange said that neither the precise percentage nor the precise length of the trading halt has been decided upon. However, the halt is expected to be brief, on the order of about 15 minutes, she said.
The goal of the mandatory trading halt would be to diminish the extreme gyrations in stock prices that have characterized the market in recent months. Exchange officials say that a standard procedure for trading halts could add stability and order to financial markets that recently have appeared chaotic.
Since the proposal represents a formalization of a procedure already in place, it is by no means clear that the casual investor would notice much difference in stock market behavior. Other proposals that have been discussed, such as halting trading in individual stocks or the entire market for the remainder of the day whenever prices move up or down by a fixed percentage, would have a much greater impact.
However, the cumulative effect of various NYSE reforms could produce noticeable changes. Last week the exchange announced temporary restrictions on computer-directed program trading whenever the Dow Jones industrial average moves up or down by 75 points in a single day.
This computer-directed trading, which frequently involves the simultaneous trading of stocks and stock index futures contracts, has been cited as a primary cause of both the steep drop in stock prices last October and the continuing daily swings in prices. (Stock index futures contracts represent broad stock market averages, such as the Standard & Poor's 500, and give investors the opportunity to bet on the future direction of the overall market and to engage in other trading strategies.)
The NYSE restrictions on program trading bar investment firms from using the exchange's automated order system to engage in computer-directed buying or selling of stocks whenever the Dow average moves up or down by 75 points. Without access to the "SuperDot" system, many of the major firms would be unable to execute the computer-directed trading strategies.
The SuperDot system was originally designed to process orders from individual investors in an efficient manner. The NYSE experiment to suspend its use for program trades is designed to add stability to the market and to favor individuals by giving firms executing orders for small investors greater access to the automated system.
The NYSE is not alone in its efforts to bolster investor confidence. The Washington-based National Association of Securities Dealers announced last week that the Securities and Exchange Commission has approved plans for a new computerized order system that is designed to improve the handling of buy and sell orders in the over-the-counter market.
The Chicago Mercantile Exchange and the Chicago Board of Trade recently imposed broad daily price limits on stock index futures contracts. If an index futures contract moved up or down the specified maximum, trading would be halted for the remainder of the day. The broad daily limits placed on the most heavily traded contract -- the S&P 500 traded on the Chicago Mercantile Exchange -- are equivalent to a daily movement of about 220 points in the Dow Jones industrial average.
What all of these individual proposals lack is any effective coordination between markets. As the Brady Commission recently advised President Reagan, traders increasingly view the stock and futures markets as one market.
The Brady panel said that separate regulation of stocks and futures exacerbated problems in October. The commission called for unifying regulation of the stock and futures markets by putting one federal agency in charge of both.
When congressional hearings begin early next month, legislators probably will weigh the impact of recent actions by the individual exchanges against the Brady Commission's recommendation that more comprehensive steps are needed to avert another stock market disaster.