In a technological and competitive breakthrough, Merrill Lynch, Pierce, Fenner & Smith, Inc., yesterday announced it had developed an electronic system that allows it instantaneously to find the best market for a stock among the nation's various exchanges.

Called the Merrill Lynch Best Price Selector, the firm said it is "capable" of taking a customer's order, scanning all the quotes in the consolidated quotation system and sending the order to the best market for the stock. The system accomplishes these steps within a fraction of a second."

The firm chose a congressional hearing on the slow-paced development of a national market system to make its dramatic announcement. The 3-day hearing, which began yesterday, is before a House Commerce subcommittee.

The development will not be well received by most of the securities industry, which for various reasons has resisted the national market system concept.

For example, an electronic system linking various exchanges would undermine the role of the specialists on the floor of the New York Stock Exchange, who for decades have controlled trading the stock of member firms.

It was to cancel out these special interests, among other reasons, that Congress in 1975 mandated the creation of a national market system.

The Securities and Exchange Commission has been ordered by Congress to oversee the establishment of the system. So far, the SEC has taken a hands off attitude, letting the securities industry come up with a system all its own.

With the exception of Merrill Lynch, however, the industry has made scant progress towards the new system.

A recent report to Congress by the General Accounting Office urged that the SEC be required to provide the securities industry with a plan for developing a national market system. The GAO also called for a firm deadline to be set for creation of the system.

On Tuesday, in testimony before a House subcommittee, officials from the SEC will give their view of the progress in carrying out the 4-year-old mandate.

In testimony yesterday, William A. Schreyer, president of Merrill Lynch, echoed the GAO in calling for a definite plan for a national market system.

"Despite torrents of words and showers of papers on the subject," Schreyer said, "no one in any position of authority has yet defined what a national market is."

Later, in an interview, Schreyer said: "We feel the SEC should define what it wants and tell the industry."

Schreyer said that the present system is not capable of handling the daily trading volume in stocks he anticipates in the coming years.

Schreyer noted that his firm had developed its admittedly limited version of the national market system for a modest cost and within a relatively brief period of time.

"Contrary to some estimates concerning the cost and complexity of such a project, we were able to develop our system in less than 12 months at a cost of approximately $80,000," Schreyer said.