NASDAQ moves on improvements

Under investigation by the U.S. Justice Department and the Securities and Exchange Commission (SEC) for allegedly fixing prices and other abuses, NASDAQ (National Association of Securities Dealers Automated Quotation) recently announced two steps to improve the nation’s second-largest stock market.

A 7-person committee, led by former U.S. Sen. Warren Rudman, will conduct a wide-ranging review of NASDAQ to see how it can be improved, Knight-Ridder reports.

Meanwhile, NASDAQ has unveiled a proposed new trading system, N-Prove, which, if approved by the SEC, would improve the ability of small investors to place limit orders, or orders to trade a stock at a specific price. NASDAQ officials say N-Prove, under development for more than a year, is unrelated to the governmental investigations. It acknowledges, however, that the investigations sparked the creation of the committee, whose task is to assess the performance of NASDAQ’s self-regulatory arm, the National Association of Securities Dealers.

Committee members, mostly prominent Washington lawyers with SEC backgrounds, are expected to conclude their study by March or April and make recommendations.

The N-Prove system, which would be voluntary, would allow limit orders of up to 1,000 shares of stock to be disseminated to all market makers in the NASDAQ system. Limit orders now reside with just one market maker, which often makes them ineffective. In addition to widely disseminating limit orders, the N-Prove system would allow them to be automatically matched, without dealer intervention.

It also would provide limit orders to information vendors, such as Reuters, if the order is at a price superior to any market-maker’s bid and offer quotation.

The N-Prove system would be accompanied by new limit-order measures that would require that customer limit orders be placed ahead of any trading by market-makers.

N-Prove would replace NASDAQ’s Small Order Execution System, which was put in place after the 1987 stock market crash to accelerate and record electronically the orders of small investors.