SEC Proposals May Give Small Investors Better Prices on Nasdaq
WASHINGTON — Responding to criticism of Nasdaq trading practices, the Securities and Exchange Commission on Wednesday proposed major changes in rules that could generate better prices for individual investors in the rapidly growing over-the-counter markets.
Dealers must give investors the same buy and sell prices enjoyed by the huge institutions now trading through private electronic networks, known as hidden markets, according to the new regulations developed by the SEC.
If adopted by the agency, the rules would govern trading on all stock markets, including the New York and American stock exchanges, but the biggest impact could be felt on the Nasdaq stock market, which links thousands of brokers in an electronic network.
Dealers would be required to display prices reflecting customer limit orders--requests in advance to buy or sell shares at a specific price. One common abuse has been the failure of dealers to fill orders at the prices requested in advance by customers.
The SEC proposal “will be the beginning of a constructive and vigorous dialogue with the industry and investors which will be critical to the future of our markets,†SEC Chairman Arthur Levitt Jr. said as he unveiled the regulatory package at a commission meeting.
The suggested rules “reinforce the importance of fair competition among markets and those who participate in them,†Levitt said.
The thrust of the rules is to give investors more chances to get a better price, rather than being subject to the vagaries of broker-dealers.
“The failure to display limit orders in the quotes, as well as the so-called hidden markets, may result in quotes that reflect an inaccurate picture of trading interest,†Levitt said.
Customers should also get a chance at “price improvement†on all the exchanges--an opportunity to get a higher price than the current public price, according to the SEC’s proposed regulations.
Broker-dealers must keep the trading open to allow “an opportunity to obtain an execution at a price better than the national best bid or offer,†the SEC said in its fact sheet.
The rules will be open for public comment until mid-January.
“Literally hundreds of questions will be asked,†SEC Commissioner Steven Wallman predicted. A version of the proposed rules, written in “plain English,†will be available to help get reaction from investors, the SEC said. The information will also be available through a toll-free number, (800) 732-0330.
Broker-dealers should be reassured that the SEC is not asking for radical changes in the basic trading mechanism, the SEC said.
“We are not asking the firms to build a new system,†Levitt said.
Private trading systems, such as Instinet, account for a growing share of the activity in the Nasdaq market, and the buy and sell prices are frequently better than those available to individual investors dealing with Nasdaq brokerage firms.
Under the SEC proposal, the price for 1,000 shares on Nasdaq could not be different from the price quoted for 100,000 shares marketed through Instinet, according to Brandon Becker, SEC director of market regulation.
Nasdaq’s parent organization, the National Assn. of Securities Dealers, has also proposed a new system called Naqcess, aimed at improving the handling of small orders.
A Times series last year disclosed that dealers often increased their trading profits by ignoring customers’ requests to buy or sell stocks at specific prices--the limit orders.
NASD spokesman Marc Beauchamp said the organization would have no comment on the SEC plan until it had reviewed the detailed proposals.
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Helping Investors
The Securities and Exchange Commission on Wednesday proposed far-reaching rule changes in an effort to improve price safeguards for stock market investors. The SEC’s proposals would:
* Require broker-dealers to routinely display customer limit orders whose prices are better than those available in public quotes. Limit orders are those at which investors specify the price they are willing to buy or sell.
* Require an exchange or an over-the-counter market maker that trades more than 1% of the volume in any listed stock to make its quotations public for that stock.
* Require broker-dealers to display for the public the best prices that they privately quote in other electronic trading systems such as Instinet, a unit of Reuters Holdings Plc., or Nasdaq’s SelectNet.
* Allow investors with limit orders the opportunity to trade at a better price if there are shifts in prices before their orders are executed.
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