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NASDAQ OFFERS PROPOSALS TO COUNTER CLASS-ACTION SUIT

The Nasdaq Stock Market, beset by charges of price fixing and unfair treatment of small investors, took the publicity offensive this month by proposing substantial changes in the handling of customer orders.

Nasdaq's announcement came as plaintiffs in a major class action lawsuit against Nasdaq dealers charged the price fixing spanned more than 1,600 stocks, far greater than previously alleged.The nation's second largest stock market behind the New York Stock Exchange has been the focus of intense controversy in the past year. An academic study last spring suggested Nasdaq market makers - firms that buy or sell orders on behalf of customers or for themselves - conspired to keep the gap between the purchase and sale price of stocks artificially wide. A wide gap, also known as a "spread," would result in higher profits.

The study led to a broad class action lawsuit against 33 Wall Street firms, including Goldman Sachs & Co. and Merrill Lynch & Co., charging they conspired to violate the Sherman antitrust act, the main federal law banning monopolistic behavior. The Justice Department and the Securities and Exchange Commission are investigating the charges.

The firms have denied the allegations. In court papers filed last month, the firms said the lawsuit should be thrown out because it failed to specify wrongdoing and didn't provide details on how spreads were twice as wide on Nasdaq as on other exchanges.

The plaintiffs in the class action case, in a 68-page filing in U.S. District Court in Manhattan, for the first time identified 1,646 Nasdaq stocks which they claim had excessive spreads. An academic study last year suggested problems with 71 of 100 major stocks examined.

Arthur M. Kaplan, a Philadelphia attorney handling the class action case, said the number of stocks alleged in the complaint "reflects the enormity of their conspiracy."

Meanwhile, Nasdaq unveiled a series of proposals it says would benefit individual investors. Kaplan said the timing of the announcement was curious, but Nasdaq officials denied their reforms had any bearing on the lawsuit.

The proposals offer new protection for a customer's limit order. That refers to the specific price a customer wants to buy or sell stock. In the past, investors have complained dealers put their own interests ahead of the customers' in handling limit orders.

Under the new system, called "Aqcess," an investors' limit order of 3,000 shares or less would be broadcast on computer screens throughout the Nasdaq market. In this fashion, a matching buy or sell order would be executed automatically. All dealers also would know the customers' limit order exists, which isn't the case now.

A Nasdaq market maker would be obligated to execute a customer's limit order if the market maker makes a purchase or sale of stock at a more attractive price than the customer's order.

The proposals also would create a system that allows orders of 1,000 shares or less to get a better-priced bid than the current system permits.

"A primary beneficiary of this initiative will be the individual investor," said Joseph R. Hardiman, president and chief executive officer of the National Association of Securities Dealers Inc., the industry group that runs Nasdaq.

Hardiman said individual investors will be able to reduce their trading costs through the limit order protection and price improvement features of Aqcess.

Hardiman said the new rules could reduce profits of Nasdaq market makers, but said they expect dealers would make it up through higher trading volume.

By proposing Aqcess, Nasdaq scrapped controversial revisions to its small order execution system, a trading mechanism designed so individuals can get their trades executed automatically when the market is declining rapidly.