NASD Proposes 2 Stock Quotes for Some Orders

The parent of the Nasdaq Stock Market on Friday proposed creating two categories of stock quotes for so-called limit orders--one for investors, the other for a brokerage’s own trades--in an attempt to make the market for these orders clearer.

At the same time, though, the National Assn. of Securities Dealers staff unexpectedly withdrew from board consideration a provision would have let broker-dealers charge additional trading fees on Nasdaq in an attempt to lure stock orders from rapidly growing rival electronic trading networks such as Reuters Group’s Instinet.

The fee proposal is strongly supported by many large brokerages, though it’s viewed with skepticism by some big investors as well as smaller brokerages.

The two-quote proposal approved by the NASD board, which now goes to the Securities and Exchange Commission for final approval, would affect limit orders, which account for about a third of all Nasdaq trades.

In a limit order, dealers acting on behalf of investors offer to trade stock at a specific price that may be different--and better--than the quoted best dealer market price.

The use of limit orders has surged since early 1997, when Nasdaq introduced order-handling rules that gave limit orders more prominence, allowing individual investors to get “inside” dealers’ bid and asked price spreads.

But as the system now works, a limit order that is a better quote than dealers’--but for relatively few shares--can obscure a dealer quote that may not be as good but would be for a larger number of shares.

The NASD plan approved by its board calls for dealers, who now display just one limit-order quote, to post two for each stock. “This would make the true markets for the two sets of orders more transparent,” NASD President Rick Ketchum said.