SEC Expected to Unveil Rule Changes to End Nasdaq Abuses : Stocks: It would cut practices that it believes keep individuals from getting the best prices.


The Securities and Exchange Commission next week is expected to unveil a sweeping series of proposed rule changes relating to stock trading, including some that would eradicate trading abuses the agency believes exist on the Nasdaq Stock Market.

The new rules are part of a drive by SEC Chairman Arthur Levitt Jr. to eliminate practices that have kept small investors from gaining access to the best available prices for stocks, sources said Friday.

The proposals would most radically alter trading on Nasdaq, but also are aimed at giving individual investors more chances for better prices on other exchanges, including the New York Stock Exchange. One rule is designed to curb perceived abuses on rapidly growing regional exchanges such as the Cincinnati Stock Exchange and in off-exchange trading carried out by brokerage firms.


A brief SEC notice confirmed that the commission will vote Wednesday on releasing the proposals. Details of the rules remained a closely guarded secret. SEC staff members on Friday were said to still be revising some of them.

The rules are meant to greatly increase chances that individual investors will be able to get limit orders filled for Nasdaq stocks. Limit orders are orders to buy or sell at a price specified in advance. A Times series last year reported that Nasdaq dealers often ignored customer limit orders, failing to match them up with orders from other market participants that could have filled them. The dealers thus were able to boost their profits by trading at prices more favorable to themselves and less favorable to their customers.

One of the new rules would require dealers to change their publicly quoted prices to reflect customer limit orders, making it much more likely that such orders would be filled, sources said.

The rules would also make a drastic change in Nasdaq trading by giving individual investors, for the first time, at least some access to buy and sell offers on private trading systems such as Instinet, owned by Reuters. Instinet now accounts for about 20% of the trading volume in Nasdaq-listed stocks. But even though it often has the best prices, individual investors seldom have access to it.

SEC spokeswoman Jennifer Scardino said she couldn’t discuss any of the proposed changes before they are announced. The SEC will publish the proposed rules, then allow a 90-day period for public comment before taking a final vote.

The rule changes would be the second major proposed overhaul for Nasdaq in less than two weeks. On Tuesday, an independent committee led by former Sen. Warren Rudman proposed a complete restructuring of Nasdaq’s parent organization, the National Assn. of Securities Dealers.


NASD spokesman Marc Beauchamp said the association wouldn’t comment on the SEC’s proposals until they are unveiled. But he noted that the NASD is expected to give the SEC this coming week a proposal for a new system for handling small customer orders, called “Naqcess,” that would give more public exposure to some small limit orders.

The SEC proposals will also address complaints that individual investors may not be getting the best possible prices for NYSE-listed stocks when orders are executed away from the Big Board’s trading floor. The issue has to do with what’s called “price improvement”--the chance to get a price better than the current publicly quoted price.

A growing share of trading in NYSE stocks is being handled away from the Big Board. There are two forms of this trading that directly affect small investors, who often don’t realize that their orders to buy or sell Big Board stocks may not be executed at the NYSE. One is the regional stock exchanges, such as the Pacific, Boston or Cincinnati exchanges. The other is so-called 19(c)3 trading, named for a section of SEC rules that allows brokerage firms to execute trades in certain NYSE stocks in-house, without going to any exchange.

Current rules require that customers get the best publicly quoted price when trades are done either on or off the Big Board trading floor. But the SEC is concerned that customers may be getting better-than-quoted prices much less often on trades executed away from the Big Board than on. The new rules would establish strict standards for price improvement.

The rules would have a big effect on the Cincinnati exchange, a computerized exchange with no trading floor that actually is based in Chicago. The Cincinnati exchange has been growing rapidly since 1991 under a program that lets member brokerage firms execute their own customers’ trades themselves, handling both the buy and sell sides of transactions.

This is very profitable for the firms, assuring them of two commissions in each transaction. But critics have claimed that this reduces customers’ chances of getting a better price from others trading in the same stock. Cincinnati’s officials have strongly disputed that trades executed on the New York exchange get a significantly higher rate of price improvement.


The rules also could have an effect on the Chicago Stock Exchange’s plans to open a new stock exchange, the U.S. Stock Exchange, which would operate much like the Cincinnati.

The Big Board itself wouldn’t be spared from the impact of the rule changes. Sources said the proposals on customer limit orders affecting Nasdaq are also meant to have an impact on Big Board trading.

NYSE spokesman Raymond Pellecchiacq said the exchange won’t have any comment until after the proposals are announced.