THE COLLAPSE ON WALL STREET - Stock and Futures Exchanges Relied Upon Only a Few New Safeguards

WASHINGTON — 

Friday’s sudden plunge of nearly 200 points in the Dow Jones industrial index revived nightmares of the October crash two years ago, but few of the market safeguards adopted with much fanfare in late 1987 were invoked.

On the New York Stock Exchange, there was no occasion to impose the most dramatic restraint: a “circuit-breaker” one-hour halt in trading if the Dow falls 250 points, then a two-hour pause if total damage hits 400 points.

Trading in Walt Disney Co. stock, though, was interrupted for five minutes under an exchange procedure designed to control program trading, a spokesman for the NYSE said.

And on the Chicago Mercantile Exchange, trading in index futures was halted twice for 30 minutes each as part of a lesser-known constraint known as a “sidecar.”

The real test of the new mechanisms may come Monday, if a wave of panic selling follows Friday’s plunge. Of particular interest to small investors will be reforms intended to ensure that their orders are not shunted aside in the crush of business.

The NYSE last year implemented an Individual Investor Express Delivery Service, which gives trade execution priority to small orders when the Dow Jones index moves up or down 25 points from the previous day’s close. The National Assn. of Securities Dealers, which operates the over-the-counter market, inaugurated a Small Order Execution System that penalizes dealers who fail to execute small orders.

Some experts are not optimistic that these mechanisms will work.

“There was a lot of smoke, a lot of noise and a lot of hearings after the crash, but very little was actually done with respect to small investors,” said Hartley T. Bernstein, a New York securities attorney who represents individual investors.

“I don’t think the individual investor views the system as having changed much,” added John Markese, director of research for the American Assn. of Individual Investors. “It is not enticing many people back.”

Despite Friday’s plunge in the final two hours of trading, volume did not reach crisis proportions. Some 250 million shares were traded on the NYSE, well above the 170-million daily average this year but far below the then-unmanageable volume of more than 500 million shares a day reached during the worst days of October, 1987.

“There was no problem with the volume today,” the NYSE spokesman said.

The NYSE has abandoned a temporary initiative to curb computer-driven program trading, which was responsible for much of the volume during the 1987 crash.

In the face of Friday’s plunge, the over-the-counter market instituted no special procedures. Joseph Hardiman, president of the National Assn. of Securities Dealers, reported that prices declined only 3%, compared to nearly 7% in the main Dow index and just over 6% in Standard & Poor’s 500-stock composite index.

Over-the-counter volume--about 167-million shares, compared to a 1989 average of 130 million--”was heavy but orderly,” Hardiman said.

Hardiman said the over-the-counter market, unlike the NYSE and the American Stock Exchange, adopted no automatic “circuit breaker” system to slow or halt trading. “We don’t use any formula to close down,” he said. “We use judgment.” At the American Stock Exchange, a spokesperson said, total volume of 19 million shares was well within that market’s capacity. The American exchange uses the same circuit breaker standards as NYSE and relies on the Dow index. Like the NYSE, it did not halt trading.

The sidecar procedure, which halted trading on the Chicago Mercantile Exchange twice, is designed to slow any downward pressure exerted by falling stock index futures prices on the stocks themselves and to prevent heavily traded stocks from falling into an abyss because no specialist buyer of last resort is available.

The mechanism was put in place after the 1987 crash to prevent coordinated plunges in stocks and stock index futures. Stock index futures are contracts to buy or sell a basket of stocks at a specific price and future date, and whose value is determined by a particular stock index, such as the S&P 500.

Oswald Johnston reported from Washington and Bill Sing reported from Los Angeles.