Will Dow's index join pork bellies in futures trading?
Standard & Poor's Corporation and Value Line are pleased to see their indexes traded like commodities futures. But Dow Jones & Co. doesn't want to see the Dow Jones industrial average bandied about like so many pork bellies.
So Dow Jones, publisher of the Wall Street Journal and other financial publications, has gone to court in Chicago to prevent the Chicago Board of Trade from beginning a stock market futures index using a near-replica of the 30 stocks used in the Dow Jones index. Oral arguments will be heard starting today in the Cook County Circuit Court.
Dow Jones, in its only public statement about why it won't permit the Chicago market to trade its average, said, ''As a leading provider of business, financial, and economic news, Dow Jones has a responsibility to the public and itself to make sure neither its name nor product is associated with a speculative trading device.''
Futures contracts, which are mainly traded on commodities exchanges, allow individuals to speculate on future price movements and also allow companies that deal in the commodities to hedge their risks.
Growth in trading in stock market index futures has been rapid since February , when the Commodities Futures Trading Commission (CFTC) allowed the Kansas City Board of Trade to begin trading a contract using the Value Line index of 1,700 stocks. Last month the Chicago Mercantile Exchange started trading futures based on the S&P 500, and last week the Chicago Board of Options Exchange proposed trading a contract based on a newly created CBOE-100 Stock Index. The New York Futures Exchange expects to be trading contracts soon using the New York Stock Exchange Indexes, and interest in the new contracts is reportedly high.
Dow Jones has already informed the CFTC that if trading in a Dow Jones average begins it might decide to stop publishing the average, or to change it. As well as waging battle in Chicago, it has filed a suit in federal court in New York. (Dow Jones already lost one legal battle earlier this month when a Washington judge ruled that the company could not stop the CFTC from approving the Chicago contract for trading.)
Although Dow Jones was offered $2 million by the Chicago Board of Trade for use of its name in trading the futures contract, Dow turned it down. The Chicago exchange then said it would go ahead and trade a contract using a Dow-like average without Dow Jones's permission. The board claimed it could calculate the stock prices on its own, since the stock prices were part of the public domain. Dow countered that it had a proprietary interest in its average. The board went to court to get a declaratory judgment on the matter.
In the courtroom battle, the board presented Prof. James Lorie of the University of Chicago's Graduate School of Business as an expert witness. Professor Lorie, in an interview, said he mainly explained to the judge the economic functions served by futures markets. He said he had no comment on the legality of what the Chicago board was doing, but added, ''I think it would be a useful contract if trading were permitted.''
Asked about the potential for manipulation of the average, he replied that he thought the prospects were ''extremely remote,'' since the stocks making up the Dow have a market value of $200 billion.
In Washington, the CFTC likewise decided it would be in the public's interest to trade an average based on the Dow. A CFTC spokesman says it met the commission's requirement of having an economic purpose. The CFTC did not consider whether or not the Chicago board had Dow Jones's permission to trade the average.
So far, Value Line and S&P say they have had no problems with having their own averages traded. Mark Tavel, director of research at Value Line, says: ''I suppose our index has received some attention it otherwise wouldn't have received. We've had some publicity which has not damaged us.''
At Standard & Poor's, Donald S. Rubin, vice-president for public affairs, says the organization ''doesn't view the trading as hurting S&P's reputation.'' He said S&P has agreed to allow the Chicago Mercantile Exchange to use the average only on a pilot project basis for 18 months so S&P can evaluate the effect of the trading.
Both organizations are getting paid for the use of their indexes. S&P is also involved in a legal battle with the New York Commodity Exchange, which has tried to begin trading a Comex 500 index. A judge has granted S&P a preliminary injunction.
Some observers believe Dow Jones has reasons other than those it has publicly stated for not wanting its average used. For example, an individual who works for a financial organization says he has heard that the company ''is not proud of its average, since it's the weakest of half a dozen averages for analyzing the stock market, and it would highlight that weakness if it was not the top contract traded.'' He adds, ''Can you imagine how Dow would feel if the evening newscast started using the S&P average instead of the Dow?''
A spokesman for Dow Jones, Lawrence Armour, denies this is the case.