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Sec Schedules Vote On Rules For Nasdaq Orders Brokerages Say Requirements Are Excessive, Could Backfire

The Securities and Exchange Commission said Wednesday it plans to vote next week on the second part of its campaign to clean up the Nasdaq Stock Market - new rules aimed at improving the handling of customer orders.

The rules are fiercely opposed by many Wall Street brokerage firms, which view the action as excessive government intervention that could dry up investment in small companies.

While the scope of the final proposal is unclear, SEC Chairman Arthur Levitt Jr. said earlier this month the new rules will “play an especially important role in protecting investors on the Nasdaq market.”

Nasdaq, the nation’s second-largest stock market, and its parent were formally censured by the SEC earlier this month for failing to police the market and ordered to spend $100 million over the next five years to improve surveillance. In July, the Justice Department settled a two-year investigation against 24 brokerage firms by ordering them to tape telephone calls of brokers and take steps to prevent a form of price-fixing in quoting of Nasdaq stocks.

The SEC rules, first proposed in September 1995, are aimed at putting customer orders on equal footing with professional orders on all markets, particularly Nasdaq.

One proposal would require Nasdaq dealers to display customer limit orders on the Nasdaq system. A limit order is an investor’s request to buy or sell stocks at a specific price, not just the going market price.

Allowing customer orders to compete with dealer quotes could narrow the gap between what Nasdaq dealers are willing to pay to buy stocks and what they want to receive in a sale. A narrower price spread lowers trading costs for investors but also cuts into dealers’ profits.

The proposal also would prohibit brokers from offering to buy or sell stock in private computerized trading systems at prices better than its public quotes for the same stock. The SEC’s report on Nasdaq found that dealers were getting more favorable prices when trading in computerized systems reserved for professionals, such as Nasdaq’s SelectNet or Reuters Ltd.’s Instinet Corp. systems.

One major Nasdaq dealer, Herzog, Heine, Geduld Inc., attempted to delay the action by pushing for Congress to require a lengthy study of how the rules would affect competition and trading on Nasdaq.

“It is not clear that these rules will reduce transaction costs for small investors,” Herzog Heine said in a statement last month.

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