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


February 09, 1997|By Bill Atkinson | Bill Atkinson,SUN STAFF

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."

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