A review of regulatory mechanisms to control the volatility of prices
Today's attention focuses on stock price volatility. As in earlier years, the proposals garnering most of the attention seek to control stock price volatility by regulating futures markets, particularly stock-index fitures contracts. This article reviews the evidence on three mechanisms that have been proposed to control price volatility. The first is to increase margin levels. Proponents of this mechanism argue that higher margins would discourage destabilizing speculation. A second proposed mechanism is to set price limits or "circuit breakers" in futures markets. Proponents of this approach claim it would allow markets to cool off. A third proposed mechanism is to impose a tax on each transaction of a futures contract. Casual descriptions of transactions taxes refer to them as solving volatility by throwing sand in the gears of the futures market. In the sections that follow, we assess the existing research on each of these three methods and their underlying rationales.