SEC Chief Proposes Major Changes in Stock Trading Rules, Regulation : Markets: Levitt says a revamp of system could give investors much better prices and reduce trading costs.

Securities and Exchange Commission Chairman Arthur Levitt proposed far-reaching stock-market reforms Thursday that could eventually reshape the ways stocks are traded and U.S. securities markets are regulated.

In a speech at New York’s Columbia University Law School, the nation’s top securities cop outlined a series of proposals intended to make the New York Stock Exchange and other major stock markets fairer for investors--particularly individuals--by removing some of the decades-old impediments that can prevent them from buying or selling stocks at the best prices.

Levitt stressed that his ideas are just suggestions at this point, and that he has not settled on specific plans. However, experts said his comments--coming in what was billed as a major address--are likely to hold great sway in the roaring debate about how markets will operate in the dawning era of electronic trading.

“In the next few years, [markets] will undergo a transformation like we have never witnessed before,” Levitt said. “We have an opportunity today that we may not have again in our lifetime--to realize the vision for a true national market system.”

Indeed, the structure of the securities markets is undergoing its most dramatic change since the 1970s because of the advance of technology and the huge influx of small investors into the markets.

Though some of the issues addressed by Levitt on Thursday are complex and may not directly affect how individuals trade stocks, collectively his market-reform ideas could have a dramatic impact on small investors, experts said.

“It’s momentous,” said Harold Bradley, a trading expert at the American Century mutual funds group. “This was the most investor-friendly speech that a chairman of the SEC has ever given.”

The thrust of Levitt’s proposal focuses on how to assure that individuals get the best price when they place an order--that is, the highest possible price when selling a stock and the lowest when buying.

Some experts contend that the traditional methods of trading stocks on the NYSE and Nasdaq Stock Market often saddle investors with inferior “fills” on their orders, to the enrichment of Wall Street firms that handle the orders for them.

Levitt’s vision of a national market is one in which investors would be assured of getting favorable prices because their orders would be pooled electronically with all other orders in the market at that moment.

The idea of a national market has been around for decades and was identified as an important goal by Congress when it did a dramatic revamp of securities laws in 1975. But Wall Street’s self-interests have limited the linkage of competing markets, critics say.

And in recent years, the emergence of so-called electronic communications networks that compete directly with the NYSE and Nasdaq has further fragmented markets. Investors in one market or electronic system cannot necessarily link with investors in another venue.

The core of Levitt’s idea is a “virtual limit-order book” in which so-called limit orders in all trading systems would be linked electronically. Investors use limit orders to trade stocks at specified maximum or minimum prices.

But the notion of a centralized limit-order book may come under fire from brokerages, which have objected for years to similar proposals by Nasdaq officials.

“This gores a lot of oxes,” said Robert Colby, deputy director of the SEC’s market-regulation unit.

Theoretically, a central order book could lead to the creation of a fully electronic link among various trading venues that would let investors in one market interact with those in another market, Colby said.

A central order book also could create a “priority” ranking system forcing Wall Street firms to promptly execute limit orders.

“With priority rules you would be protecting people . . . and encouraging them to submit limit orders,” said Dan Weaver, a professor at the Zicklin business school at Baruch College in New York. “That would increase [the number of orders] in the marketplace, which would reduce volatility.”

Levitt also endorsed several other initiatives:

* He said the “access fees” electronic trading networks charge some investors to trade are “all but paralyzed,” and he indicated that those levies should be eliminated.

“We would certainly support the elimination of those fees,” said Matthew Andresen, president of Island ECN Inc., one of the biggest electronic systems.

* He strongly criticized an NYSE rule that forces Wall Street firms to trade on an exchange--by default, often the NYSE itself--all stocks that were listed on the Big Board before April 1979. Critics have blasted that rule as anti-competitive because it generally bars electronic challengers from trading IBM and other key stocks--and, theoretically, from lowering the costs that investors incur to trade those shares.

* He labeled as “intriguing” an idea to create a single self-regulatory agency to oversee certain trading issues. He said that the NYSE and Nasdaq, which are considering plans to sell shares to the public, must “at the very least” maintain “strict corporate separation” of their trading and regulatory units.

“As always, we maintain that ensuring the protection of America’s 70 million individual investors remains paramount,” the NYSE said in a statement.