Federal futures market regulators yesterday suggested raising margin deposits on stock index futures contracts and called for a new system to catch traders who use the futures markets to benefit from inside information about the stock market.
In its report on what caused the October stock market collapse, the staff of the Commodity Futures Trading Commission concluded that computerized programs for trading stocks and stock index futures were not to blame.
"The massive wave of selling that engulfed both the stock and futures markets on Oct. 19 was precipitated by an unprecedented change in investors' perceptions and was not initiated by technical trading strategies," the futures agency staff said.
The CFTC staff study said there were "relatively high levels" of portfolio insurance trading and index arbitrage on the day the stock market took its biggest dive ever, but there was no evidence the computerized trading tactics set off a cascade of stock and futures prices, as New York Stock Exchange President John Phelan has charged.
The Brady Commission, appointed by President Reagan to investigate the causes of the October plunge, said in its report last month that such program trading contributed to the decline.
The CFTC report was issued on the eve of Senate Banking Committee hearings into the market collapse. Nicholas Brady, who headed the presidential task force, and Federal Reserve Board Chairman Alan Greenspan are scheduled to testify today.
The Securities and Exchange Commission, meanwhile, is scheduled today to release its analysis of what went wrong on Black Monday. SEC and CFTC officials have already indicated that the two agencies do not entirely agree on the impact of stock index futures on the market.
Arguing that stock index futures trading makes stock prices more volatile and scares away small investors, the NYSE's Phelan and a growing number of other Wall Street officials have called for curbs on program trading of stocks and stock index futures.
During Sunday's Super Bowl telecast the brokerage firm of Shearson Lehman Hutton repeatedly broadcast a commercial criticizing program trading and saying that the firm no longer does such trading for its own account.
In an unexpected endorsement of one criticism of stock index futures trading, the CFTC staff suggested the self-regulating commodity exchanges ought to voluntarily raise the margin deposit or downpayment on stock index futures. Some critics have suggested the Federal Reserve ought to set stock index futures margins, just as it sets margins for purchasing stocks on credit.
The staff recommended that "consideration be given to the addition of a percentage 'cushion' to margin levels." While critics of stock index futures want higher margins to discourage speculation, the CFTC staff said it thinks margins should be raised to protect the markets from losses in the event of another crash.
The CFTC study urged no new regulation of stock index futures, but suggested some government action may be needed to stop an unusual form of intermarket insider trading known as front-running.
Front-running generally refers to trading based on inside information about stock market orders that could affect prices -- such as a tip that a big pension fund is about to sell a large portfolio of stocks.
A Wall Street trader who got inside information on a massive sale of stocks that would be expected to push down prices might be able to use that information to make money trading stock index futures contracts.
Stock and commodity market rules generally ban front-running as a violation of "just and equitable principles of trade" but the CFTC staff suggested those rules may not be effective.
The staff called on the commission "to establish standards for identifying potential intermarket front-running trading patterns" and to set up a system to enable the SEC and CFTC to spot potentially illegal front-running in the stock and futures markets.