Nasdaq System Takes Troubles In Stride Blunders, High-Tech Plunge Challenge Resilient Stock Market

The stock market’s turbulence could not come at a worse time for the electronic trading system known as Nasdaq.

Prices for many Nasdaq stocks have plummeted from record highs set last month. Nagging questions have been raised about whether Nasdaq adequately polices dealers and protects investors from cheating. The Nasdaq system has suffered some chronic technical glitches.

Nonetheless Nasdaq, the main marketplace for small and growing companies, is far from out.

Investors are unlikely to stop dealing on Nasdaq as long as Nasdaq lists the stocks they want to buy and sell, including such heavyweights as Netscape Communications, Microsoft Corp. and MCI Communications Corp.

And significant defections are not likely, analysts said, even among companies that meet the bigger capitalization requirements to trade on the New York Stock Exchange.

“I’m doubtful that the recent poor performance of the Nasdaq is going to have an impact on the number of companies that list on the Nasdaq,” said Paul Greenwood, senior research analyst at Frank Russell Co. in Tacoma.

Greenwood and others say Nasdaq’s retreat stems more from the volatility of technology stocks, its major constituents, rather than any hostility on the part of investors or companies that trade on the Nasdaq system, a far-flung network of dealers linked by phone and computer.

Still, Nasdaq has been hit with a one-two punch in the past week.

On July 17, two dozen Wall Street firms settled a nearly two-year federal investigation of Nasdaq price fixing and fee padding, by agreeing among other things to install expensive monitoring systems that federal regulators can demand to see unannounced.

The settlement was reached in the middle of a significant market retreat. From an all-time closing high of 1,249.15 on June 5, the Nasdaq composite is down 15 percent, closing Thursday at 1,062.39.

Blue-chip stocks also have declined, but not nearly as much. From its all-time closing high of 5,778.00 on May 22, the Dow Jones industrial average is down 6 percent, closing Thursday at 5,422.01.

Analysts who believe the stock market is cyclical said the retreat makes sense. The Nasdaq outran the Nasdaq troubles/ Dow Jones average significantly in 1995, rising 40 percent compared with 33 percent on the blue-chip average. Now, they said, it is payback time.

Last year, 58 companies left the Nasdaq system for the Big Board. Another 32 defected in the first half of this year.

But the number of overall Nasdaq listings also has grown, keeping defections at just 1 percent of the total, said Marc Beauchamp, a spokesman for the National Association of Securities Dealers.

The Washington-based group is the parent of Nasdaq, an acronym for National Association of Securities Dealers Automated Quotations.

And new companies continue to list. Initial public offerings were a record 333 for the first half of this year, compared with 476 in all of 1995. Companies totaling $13.9 billion in capitalization did IPO’s, compared with $16.7 billion for all of 1995.

Nasdaq has encountered problems keeping up with the growth in issuance and in trading, despite a $170 million improvement to its communications system completed at the end of last year that doubled its trading capacity.

Technical glitches are less frequent than previously. But just last week, Nasdaq had to retransmit a number of closing stock prices that had been sent inaccurately.

More disconcerting than technical inconveniences is the criticism that Nasdaq has been less than vigilant about checking out the companies that list with it.

Despite its recent troubles, Nasdaq hit a record daily trading volume of 877 million shares on July 16.

“Investors and companies have voted with their dollars that they have confidence in the Nasdaq market, and they should have increased confidence after this period of intense review,” Beauchamp said.