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SEC Report on 1989 Mini-Crash Calls for Tighter Specialist Standards

December 28, 1990

NEW YORK (AP) _ The Securities and Exchange Commission, in a report on the October 1989 market drop, called on the nation’s two major stock exchanges Friday to tighten performance standards for professionals who regulate trading flow.

The SEC said the New York and American stock exchanges performed well overall during the 190-point tumble in the Dow Jones Industrial Average on Oct. 13, 1989, and a subsequent sharp rise on Oct. 16.

But the report cited several problems in the handling of trading on the exchanges and at the automated National Association of Securities Dealers system and called for several revisions in how trading is regulated.

The SEC’s division of market regulation said some exchange floor market makers, known in the industry as specialists, failed to perform adequately during the volatile trading, and said the exchanges should review performances and take ″appropriate remedial action.″

Specialists generally match up buyers and sellers of stock, but are required to correct imbalances by making purchases or sales from their own supplies when necessary to maintain fair and orderly markets.

The SEC report said the exchanges should use their authority to reallocate stocks when they determine that specialists display a ″substantial or continued failure″ to maintain orderly markets during volatile times.

It also said the NYSE, Amex and regional stock exchanges should consider developing capital levels for specialists based on individual stocks. Specialists are required to ″make markets″ for trading of particular stocks.

The Amex said in a statement that it continually reviews specialists’ performance, did so for the October 1989 market drop and ″has taken appropriate action where warranted.″

″However, we believe that overall our specialists performed exceptionally well during this difficult period,″ the statement said.

An NYSE spokesman could not be reached for comment. The exchange in the past has ardently defended its market-making system, saying specialists helped prevent financial catastrophe during the 1987 and 1989 market declines.

With regard to the options markets, the SEC report recommended improving procedures for halting and reopening the trading of options contracts linked to indexes of stocks during times of extreme price movements.

The report also was critical of the NASD’s over-the-counter market, saying that some market makers withdrew from trading during the drop. But it said the over-the-counter market in general performed well.

Overall, the SEC said the markets performed better during the October 1989 mini-crash than during the October 1987 crash, partly due to safeguards implemented after the 508-point drop in the Dow Jones average.

The report was the second part of the SEC’s analysis of the 1989 market slide. In June, the SEC concluded that the drop was accelerated by index arbitrage and other computerized program trading strategies. That report was criticized by other agencies and many Wall Street officials.