SEC OKs Rule Giving Small Investors a Break in Trading on Nasdaq : Securities: The new measure deals with limit orders and gives customers a shot at more favorable prices.

The Securities and Exchange Commission approved a rule Friday designed to improve investors’ chances of buying and selling stock at more favorable prices on Nasdaq.

The new rule deals with customer limit orders, which are orders to buy or sell stock at a price specified in advance. A rule already in effect forbids brokerage firms to “trade ahead” of their own customers’ limit orders--that is, the firms currently are banned from trading for their own accounts at the same or better price than their customers’ limit orders, unless they fill the customers’ orders first.

The new rule extends that protection to the extremely common situation in which a brokerage firm gives its customers’ limit orders to another firm for execution. The practice is common partly because many discount brokers and regional brokerage firms routinely send all of their small customer orders to very large Nasdaq dealers for execution. Currently, if orders are passed on from one firm to another, the firm that receives the order is free to trade for itself at better prices and leave the customer orders unfilled. That will be banned once the new rule goes into effect June 19.

Several Nasdaq dealers began complying voluntarily with the rule shortly after it was proposed several months ago.

The National Assn. of Securities Dealers, parent of the Nasdaq stock market, proposed the change following growing complaints from investors and strong prodding from the SEC.

Commission Chairman Arthur Levitt Jr. said Friday, “I believe this will be a very positive development for the Nasdaq market, and I am pleased that the NASD has taken this significant action to eliminate a significant conflict between brokers and their customers.”

The SEC and the Justice Department’s antitrust division have been investigating Nasdaq, looking into, among other things, allegations that dealers colluded to keep spreads wide. Nasdaq and the dealers have strongly denied the allegations. Spreads--essentially dealers’ profit margins--are the gap between the bid price, at which a dealer offers to buy a stock, and the higher asked price at which the dealer offers to sell.

Ordinary market orders--orders to buy or sell at whatever the current market price happens to be and by far the most common type of order from small investors--generally are filled only at the bid or asked price on Nasdaq. Limit orders provide a means by which customers can attempt to get a price inside that spread.

The new rule still contains some exceptions. Until Sept. 1, a firm that receives a customer limit order from another firm for more than 1,000 shares will be free to trade ahead of it. It gives an exemption to institutional orders, generally orders to buy or sell 10,000 shares or more.

Nor will the new rule apply to limit orders placed by options dealers. Some options dealers and options exchanges have complained about this, however, and the SEC indicated Friday that it will continue to press the NASD to propose a rule extending the same protection to options dealers. (Options are agreements giving the right to buy or sell a fixed amount of stock at a certain price before a certain date. Options dealers frequently buy and sell the underlying stock to hedge their positions and thus protect themselves against losses.)

Even for small investors, the new rule is only a partial step to eliminating complaints that brokerage firms and institutions get to trade at better prices on Nasdaq than investors do. Because each Nasdaq stock has several dealers--more than 30 for very big stocks--the new rule still won’t give customers assurances that their limit orders will be filled before dealers trade for themselves at the same or better prices. A firm that holds a customer’s limit order will be banned from doing so, but the other dealers in the same stock are still free to go on trading at the limit order price or better.

Nasdaq has proposed a new trading system for small customer orders, called Aqcess, that it contends will deal with the problem. But the proposal has received strong criticism from some investors and brokers for not going far enough, and the proposal is expected to receive close scrutiny from the SEC.