New Nasdaq Trading Rules Take Effect
After months of elaborate planning and computer reprogramming, the Nasdaq Stock Market launched new trading rules Monday aimed at increasing competition in the nation’s second largest stock market.
The new trading rules took effect at the 9:30 a.m. EST market opening for 50 active Nasdaq stocks, such as Microsoft Corp. and Intel Corp. The changes enable customers to place orders for Nasdaq stocks at prices better than the buy and sell prices posted by professional traders.
“All systems seem to be working fine,” said Robert Colby, the Securities and Exchange Commission’s deputy director of market regulation.
If the new SEC rules work as intended, investors stand to save millions of dollars in trading costs.
At Nasdaq’s computer center in Rockville, Md., senior executives expressed optimism about early trading as they gathered around computer terminals to monitor the market.
“Terrific, so far,” said Richard Ketchum, a senior vice president at Nasdaq’s parent, the National Association of Securities Dealers Inc.
Nasdaq trading volume in the first half-hour was 44 million shares, lighter than normal due to the Martin Luther King Jr. federal holiday.
“I think that’s helping a lot in terms of adjusting and keeping problems to a minimum,” Nasdaq spokeswoman Cameron Brown said of the slow trading.
One trader said the volume reflected the wait-and-see attitude of many Nasdaq dealers.
“Volume is really light now because people are really nervous,” said Jeffrey Citron, head of New York-based Island Systems, a new electronic stock trading network.
The rules are intended to prevent a form of collusion among Nasdaq dealers, identified in Justice Department and SEC studies last year, that kept stock price quotes artificially wide to keep trading profits fat. The new rules could reduce traders’ profits by $3 billion this year, an industry analyst told Barron’s magazine.
The new order-handling rules allow investors to notify the entire Nasdaq market about limit orders, with which customers tell brokers at what price to buy or sell. In the past, Nasdaq dealers were not required to display a customer’s limit order to other dealers.
The SEC hopes customer limit orders will inject new competition into the market that could narrow the “spread,” or the gap between the best offer to buy and best offer to sell a particular stock.
For example, if an investor can buy a stock at the “asked” price of $18 a share and sell it at the “bid” price of $17.50 a share, the spread is 50 cents. If the customer puts in a limit order to buy the shares at $17.75 a share, the gap between the buy and sell price would shrink to 25 cents.
The trading rules will be phased in over the next eight months, with Nasdaq’s 50 most active stocks the first to be covered. Some of the stocks, such as Intel Corp. and Microsoft Corp., have narrow spreads of about 12.5 cents to 13 cents. The spread on less frequently traded issues, such as PacificCare Health Systems Inc.’s class A shares, can be more than $1.
Market specialists believe changes will be most dramatic over time in the lesser traded stocks.
The second part of the SEC’s trading rules provides public access to prices quoted on private computerized trading networks, which often give professional traders a better deal than prices quoted on the Nasdaq system.