WALL STREET AND THE ECONOMY : Greenspan Assessment Unusually Bullish : Nasdaq Computers Taxed to the Hilt by Strong Surge in Trading Activity

As share prices plunged Wednesday, heavy volume again overburdened the Nasdaq Stock Market’s computers, creating disorderly trading in some stocks and forcing officials to take steps that put individual investors at a disadvantage, traders said.

Volume reached a record 597.5 million shares as the Nasdaq composite index fell 35.66 points to 952.87. Market officials have acknowledged that their current computer system was designed to handle a maximum of 450 million shares. In recent weeks, trading volume has consistently topped 510 million.

Among the steps Nasdaq took Wednesday to reduce the strain on computer circuits was disabling part of SelectNet--the main computer system the market’s dealers use to communicate orders to each other--for much of the trading day.

But in doing so, they greatly reduced individual investors’ chances to get limit orders filled, traders said. Limit orders are orders to buy or sell at a price specified in advance.

In addition, options traders at the Pacific Stock Exchange faced severe problems getting orders for Nasdaq stocks filled, according to Dale Carlson, an exchange spokesman. The traders had particular difficulty buying and selling shares of the biggest company traded on Nasdaq--Microsoft, whose stock fell $7.375 to $94.50.

Such problems have been frequent in recent weeks, Carlson said. “We’re having continuing problems getting Nasdaq market makers to execute orders and honor their” quoted prices, he said. In addition, Carlson said some Nasdaq dealers refused to answer their phones Wednesday--something for which the market makers were severely criticized during the October, 1987, market crash.

And he and some traders noted that the market’s computers appeared to have difficulty keeping up with dealers’ changes in quoted prices, resulting in different computer screens showing different prices at the same time.

In a written statement, Nasdaq spokesman James D. Spellman defended the market’s performance. “Given the record volume today, the Nasdaq Stock Market has functioned extremely well,” he said.

Spellman confirmed that Nasdaq had received complaints that “a handful” of firms were not answering their phones, but he said calls from Nasdaq got through to those firms promptly.

Moreover, he denied that computer screens showed inaccurate quotes, but said he had no immediate response to the Pacific exchange’s complaints that Nasdaq orders weren’t being executed.

A massive selloff of technology stocks led the drop in the Nasdaq composite index, which in point terms was second only to the October, 1987, crash. In percentage terms, however, Wednesday’s decline was not even among the 10 biggest, with the market falling only 3.6%.

Intel, which fell $8.00 to $65.25, set a record for the greatest number of shares in a Nasdaq company ever to trade in a single day on Nasdaq: 55.8 million. The old record was 47.93 million, set last year by Microsoft.

To remedy the computer overloads, Nasdaq has said it will accelerate a $180-million computer upgrade, which it now expects to complete in December.

In partially disabling its SelectNet system, Nasdaq banned “unpreferenced” limit orders--that is, orders broadcast to all of the dealers in a particular stock so that any could fill them. Instead, the market allowed orders designated for one dealer at a time.

The result was that many customer limit orders were not filled, said Arthur Smith III, a senior executive at A.J. Michaels & Co., a securities trading firm on Long Island.

Here’s why:

Each order to sell a stock, for example, had to be entered in SelectNet, designating a particular dealer as the potential buyer. If that dealer did not want to buy, the order had to be entered again, designating another would-be buyer. Because the process was so time-consuming, Smith and other traders said, in many instances the market price of the stock moved away from the range of the customer’s limit order, leaving it unfilled.

And because those orders were not filled, individual investors “were losing thousands of dollars,” said Joshua Levine, president of Jeci Securities in New York.

Unlike individual investors, institutional traders have access to alternative computer networks for Nasdaq trading, such as Reuters’ InstaNet system.

Also, Nasdaq’s system for handling small-customer orders of 1,000 shares or less continued to function Wednesday. But on Friday, heavy volume for a time led Nasdaq to shut down that system, known as SOES, for “small order execution system.” Small-customer orders can be handled either on SOES or SelectNet.

Nasdaq is the subject of federal investigations by the Justice Department’s antitrust division and the Securities and Exchange Commission, both of which are looking at market practices that allegedly put individual investors at a disadvantage.

On Wednesday, however, the SEC declined to say if it was investigating or planning any steps in response to Nasdaq’s recent wave of computer problems.

“Given the volume [Wednesday], we believe that the markets worked efficiently,” SEC spokeswoman Jennifer Kimball said. But she acknowledged that the heavy market activity had created “certain strains,” and said that “we’re working closely with the markets to see that as volume continues to grow, investors can access the markets.”

Nasdaq has acknowledged that in recent weeks, the public tape showing the prices of trades executed on the market has frequently been late, preventing the public from knowing current prices for stocks.

Some traders have also complained of other problems because of congestion on Nasdaq’s computer lines, including orders being executed at incorrect prices. They contend that this has resulted in an upsurge in “broken trades,” in which Nasdaq officials have ordered the trades canceled--at the expense of investors or trading firms--even though the fault was in Nasdaq equipment.

During the past three weeks, Nasdaq has declined repeated requests from The Times for statistics on the number of broken trades.

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More Markets Coverage:

* Stocks fall on record volume. A1

* Bond yields rise sharply. D3

* What should investors do? D3

* Small investors unfazed. D3

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A Step Back

U.S stocks posted biggest losses in two months Wednesday as concern spread that earnings among this year’s market leaders--the technology sector--will slow. The Dow Jones industrial average, down 1.23% on Wednesday, is up 20.72% for the year. The Nasdaq composite index, heavily weighted by technology stocks, was down 3.61% but is still up 26.71% for the year.

DOWN AND UP

Dow Jones industrial average, half-hourly closes for Wednesday:

Tuesday: 4,686.28

Close: 4,628.87

A LONG CLIMB FOR THE DOW

Dow Jones industrial average since Jan. 1, weekly highs, except latest:

Wednesday: 4,628.87, down 57.41

THE NASDAQ’S RUN

Nasdaq composite index since Jan. 1, weekly highs, except latest:

Wednesday: 952.87, down 35.66

TECHNOLOGY ISSUES

Percentage change Stock Wed. Since Mon. YTD Intel -10.93% -14.60% +104.30% Microsoft -7.20 -13.30 +54.60 Cisco Systems -6.97 -10.19 +47.30 Sun Microsystems -7.79 -10.13 +25.00 IBM -5.37 -5.59 +37.76 Micron Technology -4.38 -9.47 +160.00

MUTUAL FUNDS

Percentage change Fund Wed. Since Mon. YTD Fidelity Magellan -3.37% -4.93% +29.49% Inv. Co. of America -1.34 -1.95 +17.94 Washington Mutuals Inv. -0.70 -0.95 +19.27 Fidelity Sel. Tech -4.10 -5.54 +36.86 Merrill Lynch Tech -3.34 -5.56 +10.31 Seligman Commun. -4.16 -6.80 +52.40

Source: TradeLine, Bloomberg Business News, Lipper Analytical Services