The economy and the stock market: views of financial executives.
Survey questionnaires were sent to 2,000 FEI members, with 346 (17 percent) responding within the two-week period allowed. Another 149 responses were received after the April 3, 1990, deadline and were not included in the tabulation. Respondents came from companies of all sizes, both publicly traded and private, located throughout the United States.
Over 78 percent of the respondents were financial officers; the remainder held positions of chief executive officer, president, vice president, or owner/partner. Just over 40 percent were employed by manufacturing firms, 11 percent were from transportation, communication, or public utility companies, and 8 percent were engaged in wholesale or retail trade. Slightly less than 8 percent worked for banks, and only 3 percent were employed by security or commodity brokers or dealers.
Concerned about ethics
Ethics were high on the list of respondents' concerns. Asked to express the amount of concern they had about 14 economic conditions and investment trends, on a scale of one to five, with one indicating the least concern and five the greatest, respondents indicated the most concern with the ethics of the securities markets. Nearly three-fourths were concerned about insider trading, 73 percent were concerned about fraud and abuse in the marketplace, and 71 percent were concerned about the honesty and ethics of stock brokers.
Program trading was also ranked of high concern by 72 percent of the respondents, followed by leveraged buyouts 69 percent), junk boards (63 percetn), and volatility of the securities markets (62 percent). Less than half were concerned about bankruptcies, inflation, unrest and crises in other parts of the world, interest rates, or recession.
Interestingly, while 69 percent of the respondents were concerned about leveraged buyouts, the respondents were least concerned about mergers and acquisitions. Does this presage a return to well-thought-out, strategic acquisitions, arranged with substantial equity or exchange of stock?
What about the stock market?
Nearly three-fourths of all respondents said they had concerns about the current stock market. Asked to identify their concerns, respondents most frequently mentioned program trading, volatility, and their feeling that the market was controlled by large institutional investors. As in the previous question, they also mentioned concern over the honesty and ethics of brokers and insider trading. Concurring with a previous survey of FEI members on the issue of competitiveness, respondents stated a concern over the short-term emphasis of the stock market. (See Financial Executive, March/April 1990, p. 40.)
One objective of the survey was to gauge the opinions of top financial executives on such issues as volatility and program trading. When asked what they considered a large one-day drop in the stock market, respondents reported 58 points on average. However, when asked to state the point drop at which they become concerned, the average response was 75 points.
Program trading and index arbitrage
Very few of the survey respondents considered themselves "very familiar" with program trading or index arbitrage. Although 70 percent of the respondents considered themselves "somewhat familiar" with program trading, fewer than half that number considered themselves even somewhat familiar with index arbitrage.
The New York Stock Exchange defines program trading as any trade of a "basket" of 15 or more stocks at one time. Index arbitrage is one form of program trading that takes advantage of price differentials between stock index futures or options and the actual stock. Although half of all program trading is related to index arbitrage, more than a dozen other forms of program trading exist, according to the NYSE.
Respondents were asked to define program trading and index arbitrage in their own words. The definitions given indicate that the terms are frequently used interchangeably. In the definitions of program trading, 12 percent included mention of "arbitrage," 4 percent mentiioned "trading to capture price changes," 14 percent mentioned "trading, buying, selling," and 11 percent mentioned "sales" but not purchases. Over half the respondents did not attempt to define index arbitrage, and only 6 percent mentioned "indexes." Many other definitions were the same as those given for program trading.
The executives generally expressed negative feelings about program trading. Nearly 85 percent agreed with a statement that the practice encourages volatility, and almost two-thirds felt that program trading should be controlled (42 percent) or eliminated (23 percent). However, when asked to suggest measures to control volatility, almost half did not answer.
What conclusions, if any, can be drawn from this apparent lack of understanding of stock market mechanisms by even the most sophisticated financial managers? Rapid advances in technology and the creation of derivative financial instruments based on the stock market appear to have led to trading strategies so complex that they can be understood fully only by the technicians actively trading on a day-to-day basis.
Technicians exist in almost every industry, and it is not always necessary to know how they perform their operations to understand the final result. However, is it in anyone's interest for the financial markets to have become so complex that they are isolated from customers' understanding? As several executives suggested, should there be a "return to fundamental investment strategy"? Or would this be an impossible, and inadvisable, attempt to turn back the clock?
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|Date:||Jul 1, 1990|
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