Nasdaq Changes Start Monday

New trading rules will take effect on Monday for 50 stocks on the electronic Nasdaq Stock Market, the first phase of a dramatic change in the way Nasdaq issues are priced. The goal is to make the market much fairer for individual investors.

Here are answers to some commonly asked questions:

*

Q What is the major change effective Monday?

*

A Individual investors will be able to get “inside” brokerage-set bid and asked quotes on the Nasdaq market for the first time, by making offers to buy or sell at prices better than what brokerages are officially offering.

To illustrate: If the brokerage-set bid and asked prices for a stock are 25 and 25 1/2, respectively, that means a brokerage is willing to sell you the stock at $25.50 and buy it from you at $25. With the new rules, you will be able to offer to buy at 25 1/4, and your brokerage is required to either sell to you at that price within 30 seconds or show your better offer to all investors in the marketplace.

*

Q Will this be true for every Nasdaq stock?

*

A No. Initially, the new rules will apply to just 50 Nasdaq stocks--including many of the most actively traded issues, such as Microsoft, Intel, Sun Microsystems and Amgen. But some smaller names are on the list as well, such as Men’s Wearhouse, Xircom, Ross Stores and Nature’s Sunshine Products. The rest of Nasdaq-traded stocks will be phased in to the new trading system over the next seven months.

*

Q Will I be assured of getting my price for a stock if it’s better than the brokerage bid/asked offers?

*

A No. First, such orders--called “limit” orders--must be for at least 100 shares to be included in the new trading system.

Second, the number of shares you can buy or sell at your price will depend on the number of other investors in the market at the same moment. If the brokerage isn’t willing to accept your offer, it must display it on the Nasdaq system for all to see--but that is still no guarantee that other investors will be present to trade the number of shares you are looking to buy or sell.

In addition, note that brokerages are not required to display “all-or-none” limit orders--in which you stipulate that your entire order must be filled in one trade, rather than in pieces.

Still, Nasdaq expects that investors’ limit orders now will stand a much better chance of being quickly executed, because they will be certain to be shown to all potential investors. Under the old rules, brokerages were not required to display such orders.

*

Q To what degree can I “split” the official bid/asked prices for stocks? In other words, if the bid price is 25 and the asked is 25 1/8, can I put in a limit order to buy at 25 1/16, or an even smaller fractional price?

*

A If a stock is priced under $10 a share, Nasdaq rules permit you to make an offer in sixteenths and have that price displayed on the Nasdaq system.

If a stock is priced over $10, Nasdaq, for now, will not display on its system limit orders in fractions less than eighths.

However, private institutional trading systems (such as Instinet) display offered prices in less than eighths for any stock. And because brokerages now will be required to show their customers’ best offers to the entire market--including private trading systems--it is worth entering your orders in sixteenths, because there is a reasonable chance they will be executed at your price on one of the private trading systems.

*

Q Are there times when I wouldn’t want to enter a limit order, but rather should just enter a “market” order, meaning I accept whatever the best price in the market happens to be?

*

A Yes. If you want to buy a large number of shares immediately--or sell immediately--you should probably use a market order. You won’t be guaranteed a price, but your transaction will be executed quickly. With a limit order, in contrast, you don’t know how quickly your price will attract other investors, or in what quantity.

Note that even investors using market orders should benefit from the new trading rules, because the rules should result in more brokerages narrowing their own bid/asked spreads to be competitive. So the best Nasdaq stock prices offered by brokerages should get better, resulting in savings to investors when their transaction is directly with a brokerage, versus with an investor they are matched with by the new system.

*

Q The changes suggest that Nasdaq stock prices could become more volatile. Is that a risk?

*

AYes. During the trading day, prices for stocks may change much faster, as investor orders drive the market. It also may take longer to get a confirmation of your trade from your brokerage, at least early on, as the system works out inevitable bugs.