series of sharp breaks in stock prices beginning in 1987 and continuing into A 1990 have heightened concern about stock market volatility. The perception of an increasingly volatile market has led to a search for the culprit. Presently, a considerable number of fingers are pointing at programmed trading.' In response, the Chicago Mercantile Exchange, Chicago Board of Trade and New York Stock Exchange have investigated suspected market manipulation by program traders and all three exchanges have installed special electronic systems that allow them to track transactions occurring between the spot, futures and options markets. Most recently, the NYSE proposed to restrict program trading on days when the Dow Jones Industrial Average moves up or down by 50 points or more during a trading session. The rationale given by the NYSE is that "The Exchange and other Market Centers have been concerned that sophisticated trading strategies related to program trading may create excess volatility. . . , and may in fact constitute a threat to the viability of American capital markets."' Despite the public outcry concerning increasingly volatile stock prices, the scientific evidence regarding this issue is far from conclusive. Some investigators find no evidence of increased volatility in stock prices since the advent of stock index futures trading in April 1982: Other studies report mixed results? None finds an unambiguous increase in the variance of stock prices that can be associated with program trading.
Unfortunately, the above results are difficult to interpret because they are not well integrated with important general conclusions that have emerged from other 'Programmed trading is an investment strategy that involves trading on small and short-lived price differences for the same group of stocks in the spot, futures, and options markets. For further discussion see Black and Scholes (1973), C h a r (1987), Cornell and French (1983), Figlewski (1984), Fortune (1989), Modest andSundaresan (1983), andStoll andWhaley (1987).
*See for example, Torres (1990) and Torres and Salwen (1990). %ee, for example, Fortune (1989), Davis and White (1987), andSantoni (1987). Stoll(l988) finds a statistically significant increase in the variance of stock prices on the days futures and option contracts expire ("Triple Witching Days"). However, this expiration day effect is economically small on average. 4See Harris (1988), Jones andWilson (1989), and Edwards (1988).