The Nasdaq stock market is proposing a significant overhaul of its trading system for small investors.
The proposal could result in customers seeing an improvement in the price paid for their shares traded on the redesigned system for small stock orders, tentatively called N-Prove.
Economists say the possibility of price improvement would mark a significant advancement in the Nasdaq electronic market.
By narrowing the gap between a seller's asking price and a buyer's bid in certain stocks, small investors could save money and inject competition into the electronic dealer market, analysts say.
"This is a significant change, and it is a change that market makers have always resisted," said Eric Clemons, professor of finance at Wharton School at the University of Pennsylvania.
Loyalists to auction markets such as the New York Stock Exchange claim investors there get a better shake because the share price can improve in auction trading, but not in dealer systems such as Nasdaq.
Critics of N-Prove contend investors could find that their stocks end up selling for less than they expected.
"It's sort of like dropping your order in the middle of the Pacific Ocean and knowing it will end up somewhere, someday," said Linda Lerner, general counsel for All-Tech Investment Group in Suffern, N.Y., which is fighting the Nasdaq revisions.
The debate about Nasdaq's inner workings are among the many topics at the spring convention of the National Assn. of Securities Dealers, the group that oversees the Nasdaq market.
The convention, which begins here today, follows a strong year for Nasdaq: Trading volume rose 37% to 66.5 billion shares, while market capitalization rose to $791 billion, up 29%.
The NASD has proposed a complete overhaul of its controversial Small Order Execution System, a computerized system for brokers to automatically execute small orders of 1,000 shares or less.
The SOES system has created controversy because professional traders can take advantage of momentary price discrepancies among the stocks to make quick profits.
Under the new system, a customer who seeks to sell 1,000 shares of a major Nasdaq stock at a specific price--say Apple Computer at $29.50 a share--can have that order piped into the N-Prove system.
The following steps will take place:
* The trade is immediately executed if a buy order for Apple exists at that price in the N-Prove system, or if a market maker chooses to buy the shares.
* If $29.50 is higher than the current market price, two things will happen: The order will be routed to traders who specialize in Apple stock, the market makers, who can have the opportunity to execute the trade. Or a new incoming order to buy Apple stock, regardless of the price, will be matched at the $29.50 price.
Lerner of All-Tech Investment said customers could see the price of their order decline if Nasdaq dealers refused to take the order.