SEC Looking Into Problems Caused by Nasdaq Trading Surge : Securities: Agency says it’s concerned that heavy volume may have caused disorderly activity. NASD defends its performance.

The Securities and Exchange Commission said Friday that it is closely monitoring problems that a surge in trading volume has posed for the Nasdaq Stock Market and will decide whether Nasdaq may continue its emergency responses to the heavy trading.

Some traders have criticized the market’s steps as unfair to individual investors because they severely restrict investors’ chances to get limit orders filled--and thus to get prices better than those quoted by dealers. Limit orders are orders to buy or sell at a price specified in advance.

Dealers’ wide spreads in trading Nasdaq issues--the gap between the price at which they publicly offer to buy a stock and the higher price at which they offer to sell--have been at the heart of pending investigations of the market by the SEC and the Justice Department’s antitrust division.

As Nasdaq has experienced record volume in recent days, hitting 597.5 million shares on Wednesday, the market’s computer system has become overloaded.

Trades have been reported late--resulting, among other things, in various newspapers reporting different closing figures for the Nasdaq composite index. Some traders have reported that quoted prices on their trading screens have been inaccurate because of computer delays. In some instances, dealers allegedly stopped answering their phones during periods of peak volume.

On Wednesday, the Pacific Stock Exchange complained that its options traders had trouble getting trades in Nasdaq stocks executed. And in response to questions Friday, an American Stock Exchange spokeswoman said its options specialists had similar problems this week.

Brandon Becker, director of the SEC’s division of market regulation, declined in an interview to characterize the severity of Nasdaq’s computer problems, although he said he saw no evidence of widespread problems with price quotations being delayed.

The National Assn. of Securities Dealers, Nasdaq’s parent organization, has defended the market’s recent performance. But Becker said the SEC is “concerned” about reports that heavy volume has caused some disorder in Nasdaq trading.

“We are reviewing the NASD’s procedures for dealing with special volume situations, and we are discussing with the NASD what procedures could be in place to address their volume spikes,” Becker said.

Joseph R. Hardiman, the NASD’s president and chief executive, has said Nasdaq stood up well in the face of unforeseen heavy volume, and he has denied that quoted prices were inaccurate.

Nonetheless, to reduce the burden on Nasdaq’s computers, the NASD has imposed limits on the use of SelectNet, the main system its dealers use to communicate orders to one another.

On days of heavy volume, such as Wednesday, Nasdaq said, it will continue to ban “unpreferenced” orders on SelectNet--at least during the first hour of trading--to cut down on computer message traffic. (An unpreferenced order is one that is broadcast to all dealers in a stock in the hope that any one of them might accept it.)

Instead, only orders designating one dealer at a time will be permitted. C. Arthur Smith III, an executive at trading firm A.J. Michaels & Co. on Long Island, said this has greatly reduced the chance that limit orders priced inside dealers’ spreads will get filled. That’s because dealers, as a matter of practice, reject preferenced orders sent to them that are not at the exact prices they are quoting when they receive the order. And if a stock has, say, 30 dealers, Smith said, it would be impractical to send orders to them one at a time in hopes that one will accept the trade.

The effect, he said, is to increase the profits of big dealers who get a flow of preferenced orders. “It’s like shooting fish in a barrel,” Smith said. “The market maker will get the spread every time.”

Becker said the NASD imposed the emergency measures on its own, under powers given to it after the October, 1987, market crash.

Although those powers allow only for short-term responses to unusual trading conditions, Nasdaq has said it will continue to impose the limits as needed through December, when it expects to complete a computer upgrade that will alleviate the overload.

James Spellman, a spokesman for the NASD, said that after inquiries from the SEC, the NASD on Friday was filing a proposed rule change that would let the SEC accept or reject continuing restrictions on SelectNet. Spellman said the NASD had planned to file the rule change before the SEC asked about it.

Becker declined to say whether the SEC is likely to approve the change.