Nasdaq's little investors may get break New rules intended to give customers best prices on all trades; Stocks are being phased in; Spreads narrow but experts say full effect not seen; Investing

Investors who trade stocks listed on the Nasdaq stock market could save millions of dollars a year under new rules that are designed to help small investors get the best prices possible for the shares they buy and sell.

Already, the National Association of Securities Dealers Inc., the parent of the Nasdaq, is seeing narrower spreads among 50 stocks that began trading under the new rules Jan. 20.


The 50 stocks, which include companies such as Microsoft Corp., Intel Corp. and Amgen Inc., have experienced on average a 33 percent reduction in the spread -- the difference between a dealer's buy and sell price that approximates his profit -- from 36 to 24 cents, in the first 10 days of trading, according to the Washington-based NASD.

Brokers agree.


"We have seen a significant decline" in the spreads, said George K. Jennison, managing director of Nasdaq trading at Wheat First Butcher Singer Inc., a Richmond, Va.-based brokerage firm. "The average retail client is going to be the big beneficiary from these new rules."

But while it might mean huge savings for individual investors, industry experts say it's too early to tell because there's so little data with just 50 companies trading under the new rules. And they expect that dealers may look for ways to recoup lost profits from narrower spreads by charging brokers commissions that would be passed through to investors.

The 50 stocks phased in under the new rules were selected because they are some of the most actively traded issues and thus have the narrowest spreads. Tomorrow, 50 more Nasdaq companies will come under the new rules, with the phase-in to continue until all Nasdaq stocks -- currently 5,556 -- are included, perhaps by late August.

And some industry experts aren't sure how much spreads will narrow as more Nasdaq stocks come under the new rules. Typically, the more thinly traded a stock, the wider the spread.

"It is way too early to tell," said Patrick C. Ryan, president of Ryan, Lee & Co., a McLean, Va.-based investment banking firm. "The universe of stocks is too small. The stocks that are in there now are just too institutional driven."

The rules began taking effect about five months after the Securities and Exchange Commission issued a blistering report in August 1996 that found that NASD officials did little to stop dealers who buy and sell stocks on Nasdaq's nationwide computerized system from colluding with one another to inflate the spread -- and hence their profit -- on stocks.

Robert Colby, deputy director of the SEC's division of market regulation, said the rules didn't stem from the agency's August censure, but were proposed several years ago.

"It is a very, very dramatic change for the firms," he said. "On the whole they are past complaining."


The rules also apply to other exchanges, such as the New York Stock Exchange, but for the most part those markets are already in compliance.

The first rule, known as the "limit order display rule," requires dealers to display customers' limit orders -- orders to buy or sell stock at a specified price -- even if they are priced better than the dealer's own quote.

The rule applies to orders with a minimum of 100 shares and a maximum of 10,000 shares or a market value less than $200,000, the NASD said.

Before the rule went into effect, dealers were not required to display the limit order, making it harder for a trade to be executed at that price, the SEC's Colby said.

The second SEC rule, known as the "quote rule," requires firms to publicly display the highest buy and lowest sell quotes. Previously, dealers placed orders that may have had better prices on private electronic systems available only to subscribers, namely brokerage firms, mutual fund companies, insurance companies and other institutions that buy and sell large blocks of shares.

"The changes that they made are good," said James Cloonan, chairman of the American Association of Individual Investors, a Chicago-based organization that has more than 170,000 members who manage their own portfolios. "I feel the public has a right to see all the offers. There shouldn't be two levels," he said.


Cloonan says that the SEC should have passed the rules long ago, but the agency was more concerned with issues like insider trading. Now, he says, the SEC has shifted its focus toward individual investors.


The SEC has asked the Nasdaq and the other exchanges -- known as self-regulatory organizations, or SROs -- to explain how they will make sure brokerage firms comply with the new rules.

"Ultimately, it is going to be an examination process," Colby said. "We have written to each of the SROs asking them what their examination module will be. We are relatively confident that we will be able to ensure compliance."

The SEC's goal has been to put the rules in place as fast as possible. The securities industry trade groups lobbied successfully last week to slow down the SEC's ambitious timetable, which initially called for having 150 Nasdaq companies under the new rules by last Friday.

More time needed


The industry said brokerages needed more time to make sure their computer systems were adjusted and brokers trained.

Instead, the SEC will phase in another 50 stocks tomorrow and another 50 on Feb. 24.

"The industry has embraced" the rules, said John Tognino, president and chief executive of the New York-based Security Traders Association. "We have been very outspoken that what is good for the individual investor ultimately is good for everyone. That doesn't mean that there aren't some challenges."

No surprises

Brokerage firms say the first days of trading with the new rules have been uneventful.

Horace M. Lowman Jr., senior vice president in legal and compliance with Legg Mason Inc., said the Baltimore-based brokerage firm upgraded its trading system so it can accommodate the changes, and brokers have been trained.


"We did not have a difficult time with it," he said.

"We've handled it fine," added Wheat First's Jennison.

Wheat is a dealer in six of the 50 stocks that the SEC phased in for the first wave, and it adds another 12 when the next 100 companies begin trading under the new rules.

"This stuff is not terribly complicated; the rule is very simple on its own," Jennison said. "I tend to look at these new rules as the natural progression of the marketplace to a more level playing field, a playing field that is leveled between retail and institutional customers."

Nasdaq stocks traded under new rules

As of Jan. 20


3Com Corp.

Amgen Inc.

APAC TeleServices Inc.

Apollo Group Inc.

Arbor Software Corp.

Ascend Communications Inc.


Atlas Air Inc.

Cascade Communications

CDW Computer Centers Inc.

Cincinnati Financial Corp.

Cisco Systems Inc.

Coherent Inc.


Dell Computer Corp.

DII Group Inc.

Dollar Tree Stores Inc.

Doubletree Corp.

Dura Pharmaceuticals Inc.

Evergreen Media Corp.


Fifth Third Bancorp

First Security Corp.

GT Interactive Software Corp.

HBO & Company

Heartport Inc.

HNC Software Inc.


Intel Corp.

Men's Wearhouse Inc.

Microsoft Corp.

Nature's Sunshine Products

Objective Systems Integrators

Oracle Corp.


Outback Steakhouse Inc.

PacifiCare Health Systems Inc.

PacifiCare Health Systems Inc.

Parametric Technology Corp.

Paychex Inc.

PhyCor Inc.


Qualcomm Inc.

Remedy Corp.

Ross Stores Inc.

SCI Systems Inc.

SouthTrust Corp.

Sun Microsystems Inc.


Tencor Instruments

The Money Store Inc

US Freightways Corp.

U.S. Robotics Corp.

Vantive Corp.



Whole Foods Market Inc.

Xircom Inc.

To be added tomorrow

ABR Information Services Inc.

ACT Networks Inc.

Adobe Systems Inc.


Adolph Coors Co.

Advanced Technology Labs

Altera Corp.

Am. Bankers Insurance Grp

Applied Materials Inc.

Atmel Corp.


Autodesk Inc.

BMC Software Inc.

Clarify Inc.

Dentsply International Inc.

DSC Communications Corp.

Encad Inc.


First American Corp.

First Tennessee Nat'l Corp.

Gateway 2000 Inc.

Gymboree Corp.

Huntington Bancshares Inc.

Idexx Laboratories Inc.


Informix Corp.

INSO Corp.

LM Ericsson Telephone Co.

McAfee Associates Inc.

MCI Communications Corp.

Medicis Pharmaceutical Corp.


Netscape Communications

Oak Technology Inc.

Orthodontic Centers of Am.

Oxford Health Plans Inc.

Physician Reliance Network

Premiere Technologies Inc.


Quantum Corp.

Quintiles Transnational

RAC Financial Group Inc.

Raptor Systems Inc.

Regions Financial

SDL Inc.


Shared Medical Systems

Staples Inc.

Tellabs Inc.

Teltrend Inc.

U.S. Office Products

U.S. Satellite Broadcasting


United Waste Systems Inc.

Viking Office Products Inc.

Washington Mutual Inc.

WorldCom Inc.

Xilinx Inc.

Pub Date: 2/09/97