Stock Index Futures

For many small investors, last week’s gyrating stock market has been effectively closed to their desperate desires to get out or in. Tens of thousands of these shareholders have been unable for hours or days to get through to their brokers or even to get post the busy signals. In San Francisco, there was a near disruption when some investors went to the offices of discount broker, Charles Schwab, Inc. because they could not get through on the phone. They could not get in the door either.
Those investors who did reach their broker to recover their modest savings found that their sell or buy orders were “not accepted” for hours, sometimes for overnight. This was not due to a suspension in trading of the particular company’s stock; rather the official excuse was “an imbalance of orders” so that the “buys” and the “sells” could not be matched.

Funny, though. The big investors and the large institutional buyers did get through to their brokers, did get their buy and sell orders implemented. And herein, lies a chilling lesson wrapped in a still to be unraveled mystery. What the stock market plunge has taught small investors is that they can be trapped. They cannot trade with the same dispatch as large traders. The market is, in practical impact, closed to these investors who are astride treacherous seas without the anchor of their supposedly marketable decisions to protect themselves.

This two-tier access between the big and small fellows deserves investigation by both the Congress and the Securities and Exchange Commission. While at this task, they also should examine one major source of speculative volatility — the stock index options linked to computerized program trading.

These ore just bets on whether the market will go up or down. As one broker put it: “They are insurance for the big guy with the premium being paid by the small investor” There is no economic benefit to this gambling in index futures; no capital for productive wealth and no jobs created.

Remember the stock markets’ principal purpose, we are told, is to raise capital for business. Other purposes are supposed to be secondary. Well, less than ten percent of investment capital comes from the stock market and some of its other purposes — to facilitate takeovers, stock bonuses and provide the big players with a national lottery — are looming far greater in recent decades. Index trading is just the most recent extension of this lottery.

The Washington Post described “Black Monday” this way: “In effect, it was the decline in stock index futures prices that continually exerted downward pressure on stock prices in a free fall that ended when the market closed for trading.”

Shaken stock brokers may be seeing the need for some curbs at last. Several were quoted as saying that there should be a daily price limit to the upward or downward moves on the index futures, as there now is for trading commodities such as coffee or copper.

Ideally, shareholders should incur the verdict of the stock market based on rational performance of the company whose stock is held. This has rarely ever been the case. Broader economic data, broader events and fears can lift up or pull down the healthiest or riskiest of stocks. Booming Ford Motor Co., and booming Digital Equipment Co. lost over forty points each in two days. Harvard University’s endowment, invested in large established companies such as IBM and Exxon, lost nearly 25 percent or one billion dollars in the same period.

Some of these losses have already been recovered. But the grim reality is that the gambling indices are becoming a larger cause of irrational, speculative behavior by the market as a whole which overwhelms the individual, solid profit and management records of individual or groups of companies.

“There is a tremendous amount of damage done to innocent people and organizations,” said one investment firm manager. And there will continue to be such plunges so long as the rulers and regulators of the stock exchanges allow such built-in mechanisms for speculative frenzy as stock index futures to work their wild ways on trusting and helpless small investors.

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