John J. Phelan Jr., chairman of the New York Stock Exchange, is given to blunt warnings.

More than a year before Black Monday, he was pointing to the danger of a "market meltdown." In an interview Friday with Washington Post editors and reporters, he said that increasing use of certain computerized trading strategies "could destroy the market," but saw little political will to deal with the threat. Here are edited excerpts of his comments. We have been seeing wild swings in stock prices that have nothing to do with individual companies or industries, that are the result of stock index futures contracts, which let big portfolio managers speculate on the movement of hundreds of stocks at a time. Where is that taking us? It is going to destroy the market. If you continue to get that, and you continue to get all the speculation by institutions and everything else, it is going to drive everybody out of the market. It is as simple as that.

You are going to have a professional trading market that is going to be a more volatile market. {Stock index futures, such as the Standard & Poor's 500 index futures, give investors the opportunity to bet on the future movement of broad stock market averages.} What can you do about all this? We know if we wanted to stop volatility, we could stop it tomorrow. No problem with that. Just make it expensive {by raising the cost of trading}...

We are trying to find a way through this thing instead of just ripping all the structures and all the rules and all the regulations down. How do you adjust to this market when you live in a world where everybody says no matter what happens, anything goes? You have to change what you can in your own environment. It's no sense to talk out there, "You gotta shut everything down, it doesn't work anymore," because nobody is listening ... How do you turn that around? One of the things you have to be careful of is not to revolutionize the market but do it in an evolutionary way. Let it flow, not restrict it, but just have some controls on it. One of the things we try to balance is to keep the traditional purpose of the market, which is really capital raising and liquid markets after that so companies can go back and raise more capital.

So what are you doing about this? What we are trying to do now is to get an awareness of it, not to allow arbitrage to become the dominant force of any marketplace and not to allow billions of dollars of speculation to seek instant liquidity in the market.

Risk had been forgotten. A method evolved {portfolio insurance} for very sophisticated people which was wrong... . You need normal markets to have it {work}. If everybody wants to do the same thing at the same time, it can't be done. How do these big institutions use stock index futures? Aren't they just speculating? What has developed is impressive evidence that a growing pool of institutional money has said we have found this {stock index futures} an aid to our ability to shed risk or try and control risk. You can't just shut that off. Is the stock market collapse still a nightmare on Wall Street? On the dealer side ... I'll guarantee that six or nine months of this and everybody will forget it {Black Monday}. If you go outside of New York and Washington, they can hardly remember what Oct. 19 was. And by the time you reach Los Angeles, they probably don't even remember what October was. It is not a big event out there

The whole thrust today is to forget about it. It was an accident. The system will self-correct. That is a very, very dangerous attitude to have. What is going to come out of Congress as a result of the stock market collapse? Nothing. How much of the problem is the due to the deregulatory philosophy of the Securities and Exchange Commission or the Reagan administration? After the inflation of the 1970s ... the older solutions to some of the problems were not working. There was a tendency then to backtrack from government trying to do everything. This change took place before the current administration. That carried over into the current administration.

The problem with deregulation is not that it's not wrong, it's that you have got to be careful you don't take out the structural things that are necessary in society along with all the other things. You put structural things on it to support the base. ... Everybody interpreted deregulation to be no regulation. And so there began to be let everything fly and see what happens.

One example of that is a product {index futures} that is two or three years old that everybody let fly and all of a sudden you have the consequences. Isn't the real problem the Chicago futures markets and stock index arbitrage trading? I view the ultimate problem as not that Chicago developed a product {stock index futures} or that there is a Chicago exchange; our problem lies not there. Our problem lies with the customer using them. Is the answer -- as many analysts have said -- a unified regulatory control over both stock and futures trading, instead of having the SEC regulating stocks and the Commodity Futures Trading Commission overseeing stock index futures? If you gave me one silver bullet, I would put one final authority over all of these related products {in the New York and Chicago markets}. Somebody has to make the tough decision. You don't make it by everybody shuffling around. Right now you don't have anybody in charge. Why didn't the insider trading scandal have more of an impact on investor confidence? I think they thought it was in a small universe of the market. It only affected takeover stocks. It is perceived that program {trading} affects the entire market and the entire volatility. Where are we in the financial markets today? Do you think a crash could happen again? You can say it can happen again because you can always get a market correction. The big question mark right now is whether institutions have learned from the October experience. If they haven't, there is no definition of capacity or liquidity within the system.

If, in fact, instead of 10 or 12 doing it {all trying to sell at once}, 60, 80 or 100 do it ... . We have got to find a way to slow down that momentum when it starts and try to control the flood in some way so you can manage it to the liquidity that is available in the market. That we still haven't done.