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SEC Takes Aim at Nasdaq Trading : Rules are proposed to end practices by some dealers that are unfair to small investors

October 01, 1995

Small investors may get better prices when trading over-the-counter stocks if the Securities and Exchange Commission implements new rules proposed last week. The changes are aimed at eliminating practices that favor brokers at the expense of small investors.

The proposals would alter trading on the Nasdaq, the nation's busiest stock market. A Times series last year reported that Nasdaq dealers often ignored small customers' orders to buy or sell at specified prices. By setting aside the small orders, dealers were able to boost their own profits by waiting to trade in big accounts at favorable prices at the expense of the little guy.

Such practices prompted two ongoing federal investigations. The SEC continues to probe whether large brokerage firms dominate Nasdaq to the detriment of small brokers and investors. Separately, the Justice Department is investigating whether brokers colluded to keep stock price "spreads" wide, boosting their profits.

Among the SEC's recommended changes: requiring brokers and dealers to quote to the public any superior prices that they privately quote in certain electronic trading systems and to make public any customer orders that offer prices better than those available in public quotes.

This SEC action is perceived as a wider approach to what the National Assn. of Securities Dealers proposed on its own just days earlier. The NASD, which operates the Nasdaq, has unveiled a plan for a new system of small investor orders that would require the best bid or offer for a Nasdaq stock to be included in the best quote displayed on terminals that carry Nasdaq prices worldwide. The NASD also will consider recommendations of an independent committee that called for radical restructuring, including making public members a majority on the NASD board and creating two semiautonomous subsidiaries--one for the Nasdaq and another to enforce rules. Meanwhile, the NASD has ordered its 11 regional offices to investigate every investor complaint about brokers.

If approved after a 90-day public-comment period, the SEC rules would apply to all stock markets, including the New York and American exchanges.

SEC Chairman Arthur Levitt Jr. called the proposals a "kind of cultural change" for stock market professionals and said they "are built on the belief that fair and vigorous competition makes the best markets." Fair competition also makes the best sense for all parties involved, both large and small.

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