TY - JOUR T1 - A proposal to stabilize stock prices: <em>Ask the issuing corporations to join the party.</em> JF - The Journal of Trading SP - 50 LP - 57 DO - 10.3905/jot.2009.4.2.050 VL - 4 IS - 2 AU - Robert A Schwartz Y1 - 2009/03/31 UR - https://pm-research.com/content/4/2/50.abstract N2 - On Monday, October 19, 1987, for reasons that were in good part technical, the Dow Jones Industrial Average plunged 508 points, or 22.61 percent. That Tuesday, the NYSE's CEO, John Phelan, was on the phone asking the listed companies to initiate stock buybacks. In response, a series of programs was announced, and the act provided the markets with badly needed assurance.The turbulence of October 1987 was extreme, but my own research at the time had shown that short-run volatility is generally accentuated, and that supplemental liquidity is needed on an ongoing basis to bring orderliness to the markets. In October 1987, however, specialist capital was insufficient for the task, and hence the appeal for the corporate buybacks. The success of Phelan's strategic decision got me to thinking: why not formalize corporate involvement in liquidity provision? The companies have deep pockets, they have the proper incentive and, if the procedure is properly structured, they could do it.That Fall I started work on “A Proposal to Stabilize Stock Prices,” and the paper was published one year later, in Fall 1988, in the Journal of Portfolio Management. The proposal made a stir. A number of newspaper articles focused on it, I was sought out for further discussion, I presented the idea to the NYSE's Listed Company Advisory Committee, and a consulting company in France tried to implement the proposal in the French market. But then nothing happened. The prospect of the listed companies being involved in market making appeared to be too radical, too frightening. No company came forward in support of the proposal. After a few months, the markets calmed down and the idea languished.Twenty years later, in Fall 2008, volatility came back with a roar. At the time, I was involved in organizing a conference on volatility at Baruch College. While I was putting my thoughts together for a short presentation called “Markets at Risk,” I reread my earlier JPM paper. There was nothing in the proposal that I disagreed with or felt should be changed. Markets are fragile; enhanced liquidity is needed; the listed companies, as stakeholders, should be involved; and with proper market structure and an accommodating regulatory environment, corporate participation should be successful. The underlying reality is that supplemental liquidity is needed whenever markets are under stress, as they so commonly are. Perhaps the proposal will be revisited in light of the particularly high volatility that we are currently experiencing.TOPICS: Financial crises and financial market history, exchanges/markets/clearinghouses, tail risks ER -