NEW YORK, FEB. 4 -- In a move to dampen stock market volatility and bolster investor confidence, the New York Stock Exchange today acted to limit the use of its computer system for execution of a controversial program trading strategy cited by government regulators as a major factor in the October stock market collapse.

The NYSE's board approved a rule that would prohibit member firms from using the exchange's computerized order entry system to execute so-called index arbitrage trades whenever the Dow Jones industrial average moves 50 points in a single day.

Index arbitrage, a strategy in which big investors use computer programs to profit on price discrepancies between stock markets in New York and futures markets in Chicago, was identified by the presidentially appointed Brady Commission and the Securities and Exchange Commission as an important cause of market volatility during the October crisis.

The Brady Commission found that large index arbitrage trades were often executed at moments when stock and futures prices were moving sharply, exacerbating the extent and speed of the price changes. The NYSE's rule would effectively eliminate such trades on days when overall price swings are extreme.

Index arbitrage trades can contribute to market volatility because the program calls for simultaneous purchases and sales of stock index futures and large groups of stocks on the NYSE. The NYSE's computer system speeds the massive stock trade orders to the exchange floor in time to take advantage of shifting price discrepancies between New York and Chicago.

NYSE Chairman John J. Phelan Jr. said in a statement that the proposed rule, which still must be approved by the SEC, is "a step by the New York Stock Exchange toward limiting the potential market volatility caused by program trading and reinforcing investor confidence in the integrity, fairness and efficiency" of the market.

Approval by the NYSE's board of the proposed rule, which tightens voluntary restraints on index arbitrage trading already in place at the exchange, was "basically unanimous," according to Robert Linton, chairman of Drexel Burnham Lambert and an NYSE director.

"I think putting a restriction on the use of {the NYSE} computer system when the market makes a considerable move will certainly help to dampen volatility," Linton said. "Some of the estimates that are around put program trading on active days in the area of 20 percent of volume."

Linton noted that while it was theoretically possible for traders to execute index arbitrage programs without using the NYSE computer system, known as SuperDot, such trades would amount to "nothing like the kind of volume we've seen in the past."

Dissenters on the issue among the board's membership view restrictions on free trading at the exchange as likely to produce unexpected and unwanted results.

"I think when you interfere with the laws of supply and demand you end up with beautiful results -- like the farm program," quipped Bear, Stearns & Co. Chairman Alan C. Greenberg, emphasizing his sarcasm.

Since Jan. 15, the NYSE has requested its members to voluntarily refrain from using the SuperDot computer system for index arbitrage trades whenever the Dow moves 75 points in a single day. Until the new rule is formally approved, that voluntary system will continue, although the restraints will now take effect whenever the Dow moves 50 points.

Once the prohibition on index arbitrage trading is triggered, the restriction applies for the remainder of the trading day, no matter how the Dow average moves. Restrictions are not carried from one day to the next; each 50-point limit is calculated from the previous day's close.

The Big Board's proposed rule was greeted with mixed enthusiasm by officials at the Chicago Mercantile Exchange, where the majority of stock futures are traded. Testifying before the Senate Banking Committee today, Merc Chairman Leo Melamed said that while he was willing to work with the NYSE to curb market volatility, the NYSE's unilateral move might actually exacerbate price swings by disrupting the relationship between futures prices in Chicago and stock prices in New York.

"Arbitrage, using program trading that keeps the markets aligned, can be very healthy," said Merc vice president Charles Seeger. "The link between the markets should remain intact."

The NYSE's Phelan is expected to address that issue from the exchange's viewpoint when he testifies before the Senate Banking Committee Friday.