Market swings worry investors

Within 90 minutes of yesterday's opening bell, the Dow Jones industrial average had soared 200 points - a swing that some market analysts estimated at about $120 billion. Two hours later it had lost about $80 billion of the gain. Such volatile swings are turning the stock market into a financial roller coaster. As such it is beginning to worry many people.

Perrin Long, a 31-year veteran of the stock market, says such violent moves could scare away investors, large and small. Ultimately, this would impair the financial markets' ability to raise the capital that corporations use to grow.

``It used to be that if you held stocks long enough, you could get a dividend and some modest appreciation,'' says Mr. Long, an analyst with Lipper Analytical, a Wall Street research company. ``But now a lot of people are saying the stock market is a crap shooters' game. Instead of buying stock, I think I'll put my money into bank certificates of deposit, or long-term government bonds.''

As such, the volatility could hurt the capital-raising aspect of the markets. This past week, for example, market observers say no new stock issues were floated.

``How do you value something during a time like this?'' asks Edward O'Brien, the president of the Securities Industry Association. With stock prices moving in huge swings, securities analysts cannot find ways to pin down the value of a company's assets. Without a professional opinion of the worth of a company, Mr. O'Brien notes, buyers will be hesitant to buy equity in a company.

The stormy seas of the Dow are not expected to calm soon. At a press conference Tuesday, John Phelan, chairman of the New York Stock Exchange (NYSE), said, ``I think because of worldwide money flows and because of the leverage that is in the system ... you are going to continue to get that volatility for some time to come.''

To try to make the market less volatile, the New York Stock Exchange Tuesday asked member firms not to use computerized trading programs. (Story, P. 12)

In addition, introduction of new financial instruments and the globalization of money in the past five years have made it possible for a small amount of money to produce large market swings worldwide. There is ``an enormous amount of leverage on the markets,'' Mr. Phelan says. But there is little the exchange or anyone can do to control this.

For example, traders in Chicago buy and sell options on stocks or indexes of stocks. An option is the right to buy a stock at a later time for an agreed amount of money. Because it requires a smaller investment than the stock itself, many traders use options to speculate.

There are also futures contracts on all the major indexes of the stock market. In a futures contract, an investor speculates on what the level of the stock market will be at a later date. The difference between options and futures is that an investor's up-front capital requirement for futures is greater - as is risk and profit potential.

In addition, money now flows globally. Traders in Tokyo can pass their stock positions on to traders in London. British buyers can then send their stock (or bond) positions on to New York. It was because of the global nature of the trading that the NYSE decided not to close down Monday. It reasoned that investors could easily move to a different market.

Because of concerns about this growing leverage, late last year Phelan raised the possibility of what he called ``a financial meltdown'' of the markets.

The increased volatility is also making it harder for the exchanges to keep up with the trading. The NYSE admits its computer system is not set up to handle 600 million-share days such as Monday and Tuesday. The American Stock Exchange said the main disk on its computer system had run out of room with five minutes of trading left on Monday.

The volatility is also spreading internationally. Yesterday, for example, the London markets whipsawed like the US markets. The London 100-share index declined a record 250 points on Tuesday and 249 points on Monday. Yesterday, however, the index rose a record 142.2 points to 1,943.8.

In a broad-based rally yesterday in New York, the Dow Jones industrial average registered a record point gain of 187.01, closing at 2028.02, according to preliminary figures.

The market was cheered by news that President Reagan was beginning to move closer to settling his budget battle with Congress. In addition, the Federal Reserve Board remained an active participant in the money markets - helping to ease traders' concerns about rising interest rates.