Nasdaq Unveils Reform Plan for Small Investors : Securities: New computerized system aims to head off SEC action. But critics are quick to assail changes.
Moving to preempt a threat of more drastic federal reforms, the Nasdaq stock market on Monday unveiled what it described as sweeping changes designed to give small investors better prices when they buy or sell over-the-counter stocks.
The core of the plan is a new computerized system for handling small customer orders, dubbed Aqcess. Nasdaq officials said the system will increase both the chance that customer “limit orders” get filled and the likelihood that customer “market orders” get executed at prices better than those quoted by dealers.
(Limit orders are orders to buy or sell at a price the customer specifies. Market orders are ordinary orders to buy or sell at the current market price.)
“The primary beneficiary of this will be the individual investor,” said Joseph R. Hardiman, president and chief executive of the National Assn. of Securities Dealers, which operates Nasdaq.
The plan immediately drew strong criticism from some academics, regulators and longtime critics of Nasdaq, who argued that Aqcess will do little to improve current rules they say favor dealers over investors. In some instances, critics say, the new plan actually may be worse than Nasdaq’s existing system.
The proposed changes to Nasdaq’s rules come amid investigations by the Justice Department’s antitrust division and the Securities and Exchange Commission into allegations of price collusion among Nasdaq dealers and other suspected illegal practices. Nasdaq in recent weeks told dealers that it believed the SEC would order severe changes unless the market came up with acceptable changes on its own.
In unveiling Aqcess, Hardiman said Nasdaq is scrapping an earlier plan for handling small customer orders, called N-Prove, that the SEC all but vetoed in January on grounds that it provided too little protection to small investors.
Meanwhile, attorneys representing investors in a class-action lawsuit against 33 Nasdaq dealers filed papers Monday in federal court in New York alleging that the dealers acted together from 1989 through 1994 to widen spreads in more than 1,600 stocks--far more than had been alleged previously.
(Spreads, essentially dealers’ profit margins, are the gap between the “bid” price at which a dealer offers to buy a stock and the “offer” price at which a dealer is willing to sell.)
Nasdaq, which has asked a judge to dismiss the suit, did not immediately respond to requests for comment on the allegations.
Market officials said the Aqcess proposal is meant to curtail a practice known as “trading through.” Currently, a dealer is allowed to continue trading with customers at its quoted price, ignoring limit orders held by other dealers that would provide customers with a better price. Limit orders put into the Aqcess system would appear on the computer screens of all Nasdaq dealers. Matching limit orders--one to buy and another to sell at the same price--would immediately be executed by the Aqcess computer.
In addition, market orders of 1,000 shares or fewer would automatically be executed against any customer limit orders that offered a price better than that offered by dealers. If no such limit orders existed, a market order would be electronically exposed to all Nasdaq dealers for 15 seconds, in case any wanted to offer a price better than the best quoted price.
In the meantime, the order would be guaranteed to get a price no worse than the best quoted price when it first came in.
The plan must be approved by the SEC. An SEC spokesman said the agency “looks favorably upon any efforts to enhance investor protection, and the commission looks forward to reviewing the proposal.”
But one SEC staffer who declined to speak on the record said the outline does not appear to satisfy many of the objections the agency raised to Nasdaq’s earlier proposal. For example, he noted, small investors still would not have access to limit orders placed by big institutions, which often offer the best prices.
Other critics noted that the 15-second guarantee of price protection for market orders would apply only to one order at a time; the next order to come in would not get a guaranteed price until the first 15-second period was up, during which prices could change substantially in a rapidly moving market.
Critics also noted that brokerage firms would not be required to put customer limit orders in the Aqcess system, which means many of those orders still might not be exposed to other dealers.
NASD Chief Operating Officer Richard G. Ketchum said he believes, however, that brokerage firms would voluntarily use the system for small customer limit orders.
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