Computer Trading Ends at Four Firms

NEW YORK â€”  Four of Wall Street’s biggest firms said today that they have indefinitely suspended a computerized method of trading stocks because of widespread criticism that it is injecting reckless volatility into the market and destroying investor confidence.

The announcements by Salomon Brothers Inc., Morgan Stanley & Co., PaineWebber Inc. and Bear Stearns & Co. came amid an uproar about so-called index-arbitrage program trading and a protracted slump in the stock market since the crash nearly seven months ago.

Salomon and Morgan are among the most significant users of program trading, which utilizes high-volume computers to sell stocks in New York and buy equivalent stock-index futures in Chicago, or vice versa, to profit from fleeting price disparities.

Bear Stearns and PaineWebber are considered smaller users of program trading.

Salomon, Morgan and Paine Webber said they were suspending the technique as of today for their own accounts although they will continue to do it for customers if requested.

Bear Stearns said it suspended the technique for its own account as well as customer accounts as of last Thursday but didn’t publicize it until the other firms made announcements today.

Considered Significant

The action was considered significant by a broad range of investment professionals.

“I think it’s certainly a move in the right direction,� said Jack Barbanel, head of commodities and financial futures at the New York brokerage Gruntal & Co. “It’s meaningful because at least there’s beginning to be an acknowledgment of the public perception that program trading causes turbulence.�

The firms’ actions came a week after the New York Stock Exchange intensified post-crash limits on program trading, blamed for causing enormous swings in stock prices for reasons unrelated to underlying values.

Large numbers of investors have complained to the NYSE and their brokers that program trading has compelled them to get out of stocks because they believe it has made the market more like a gambling casino. Brokers also are growing resentful of the relatively small number of program traders.

Moreover, there is a belief in the securities industry that lawmakers will take severe legislative action aimed at restoring investor confidence unless brokerage firms can find ways to reform themselves.

Earlier this year, Goldman Sachs & Co., Shearson Lehman Hutton Inc. and Merrill Lynch & Co. also said they had stopped use of index arbitrage program trading for their own accounts.