A Winner for the Little Guy : SEC demands Nasdaq reform that will benefit small investors

The nation’s busiest stock exchange is under government order to treat small investors better, a move that will make the Nasdaq trading system more equitable. The quick action by the Securities and Exchange Commission corrects some controversial practices--disclosed by The Times last fall--which unfairly favor Nasdaq dealers over small investors.

The Nasdaq’s small order execution system is supposed to provide swift, automatic executions of orders of up to 1,000 shares at market prices. But the exchange has been operating under temporary rules that put tight limits on the use of the system. That works to the benefit of dealers. Nasdaq had sought SEC permission to extend those restrictions until May and replace the system with one heavily favored by big dealers in over-the-counter stocks.

The SEC nixed both requests. The commission was concerned that both the system with the temporary restrictions and the proposed new system make it too easy for dealers to illegally back away from honoring their posted prices for stocks. So beginning March 27, orders from small investors for up to 1,000 shares must be executed automatically at posted market prices.

The action was a major policy reversal for the SEC, which in recent years has typically rubber-stamped proposals from the National Assn. of Securities Dealers, the parent organization of the Nasdaq exchange. Last January, the commission approved Nasdaq’s request to put the same temporary restrictions into effect that it has now decided to let lapse.

The commission’s reversal comes amid two major federal investigations into alleged illegal trading activities on Nasdaq and follows Times staff writer Scot J. Paltrow’s investigative series on Nasdaq trading practices. Paltrow found that individual investors are much more likely to get fair treatment on the New York Stock Exchange than on Nasdaq.

The NASD insists all is in order on its exchange, where such familiar stocks as Microsoft, MCI and Apple trade daily. But it is in the public interest for the nation’s busiest and fastest-growing exchange to become fairer and more accessible to all investors.