Stocks: Time to Slow Things Down?

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And yet, backers of restrictions on short-selling believe such limits would give investors some confidence that at least one group of speculators can't so easily gang up on specific stocks. Top officials at NYSE Euronext, operators of the New York Stock Exchange, are calling for restoration of the "uptick" rule, which requires that stocks tick up in price before short-sellers can move in. The rule, which disappeared amid the growth of superfast trading in recent years, would at least hamper short-selling.

"It might address the fear environment with respect to short-selling," says Richard Ketchum, chief executive of NYSE Regulation, a unit of NYSE Euronext. He says the uptick rule could slow the "cascade selling" that is driving current prices down, seemingly unabated and irrespective of fundamental values in the stocks.

Taking a Break

Stuart I. Greenbaum, an economist who teaches about markets at Washington University and Northwestern University, says such steps to regulate the markets can force panicky investors "to sit on the side for a short while." That can help calm the jitters. "It buys you some time, nothing more."

But time can be helpful in a period when fear is trumping reason, exacerbated by automated trading. "My great anti-hero, Alan Greenspan, talked about irrational exuberance," says Greenbaum. "This is irrational depression."

Greenbaum would also like to see tougher oversight on major market players. Hedge funds, so-called algorithmic traders that use computers to move massive quantities of stock, and others that can affect prices dramatically ought to be regulated more closely, he says.

Indeed, some market watchers say regular breaks in the trading day could similarly force investors to pause and assess their decisions more carefully. Shutting down trading for, say, 15 minutes at a time, several times a day, could help investors take breaks to evaluate their trading decisions more carefully. "It might put the manual element back in to slow things down," says Aite analyst Samelson.

Bringing Trades to Light

The exchanges are looking, too, at longer-term fixes. Nasdaq has applied for the right to operate an open exchange for interest-rate swaps. Several other exchanges—such as a joint venture of the Chicago Mercantile Exchange and the Citadel hedge fund, as well as NYSE Euronext, Atlanta's IntercontinentalExchange and Eurex, the derivatives unit of Deutsche Börse—want to create markets for credit default swaps.

Such contracts have been blamed for much of the credit-market tightening in recent days. They are now typically traded between single large institutional investors and don't have the help of a clearinghouse backing them or transparent pricing. Investors are extremely nervous about the value of these invisible swaps held by financial institutions. Shareholders in, say, Goldman Sachs (GS) dont know what swaps it holds, who it got them from (from Lehman?), how much the swaps are worth, or whether the swaps threaten the firms capital. Seeing the trades in open-exchange markets would remove a lot of the uncertainty.

"The big lesson out of all of this is that more products should be made to go onto exchanges," says Meyer S. 'Sandy' Frucher, Nasdaq vice-chairman and a longtime market expert. "There is a reason why you have exchanges and why they're visible and transparent."

The opening of such new exchanges, aimed at making sorely needed improvements in the credit markets, would be a long-term solution. Indeed, they likely wouldn't start operating for at least a month, and probably not until well into next year.

To combat the immediate problems now, some experts are calling for a bold back-to-the-future step. Half-seriously, some observers argue that specialists, the floor-dwellers who for years made markets on the floor of the New York Stock Exchange, ought to be relied on as never before. The fast-fading group long lent a human touch to trades, closing them manually for buyers and sellers.

Such specialists have been largely made obsolete by the advance of computerized trading, but some believe the speed that resulted wasn't entirely a good thing. Empowering specialists anew might be impractical when millions of shares change hands instantaneously every day. But turning back the clock on the disastrous markets now plaguing investors might not be a bad thing.

Joseph Weber is BusinessWeek's chief of correspondents, based in Chicago.