Bear, Stearns & Co. Friday announced a suspension of proprietary index arbitrage program trading, joining a growing number of Wall Street firms voicing objections to the practice.
Brokerage firms say corporate, institutional equity and individual investor clients are concerned that program trading has contributed significantly to the market's recent volatility.Bear, Sterns planned to draft a letter over the weekend, to be sent to legislators and heads of markets, with recommendations to achieve "a level playing field," said James Cayne, president of the firm.
The suspension is temporary until the issue is resolved, he said.
Program trading includes a number of large-scale, computerized stock, index futures or options transactions. Index arbitrage program trading is designed to take advantage of price differences between the stock market and futures market, often by selling the stocks and simultaneously purchasing the futures contracts based on the same index.
Goldman, Sachs & Co. has suggested the New York Stock Exchange institute a so-called collar that would force the market, in times of volatility, to handle program orders manually and not through its computerized order delivery (DOT) system, said Robert E. Mnuchin, head of equity trading at the firm.
"Nobody has a quarrel with volatility. What we have a quarrel with is something that seems unnatural, excessive, synthetic," Mnuchin said. "That is the volume that is sometimes generated by these baskets of orders that are electronically entered through the DOT system.
When large stock baskets are traded, often in conjunction with buying or selling futures, the computerized transactions send a wave through the market "in a matter of seconds."
"It has the effect of a machine gun instead of a single shot rifle," he said.
Mnuchin suggested putting a collar on such trades when the Dow Jones Industrial Average moves more than 1 1/2 percent or 1 percent.