Shaken by the events of Black Monday, Oct. 19, the National Association of Securities Dealers yesterday moved to toughen rules for the nation's over-the-counter stock market.
The NASD proposed a greater use of computerized trading systems for "small" orders -- those under 1,000 shares -- and said it would be mandatory for all traders to use the system.
The changes also would make it tougher for traders to drop out when the trading action gets too hot and, perhaps, too costly.
In addition, the regulatory body said it is planning to expand its computer trading capabilities for orders over 1,000 shares, which make up the bulk of the NASD volume.
The proposals were issued in response to the problems and widespread complaints that surfaced when the market took its historic October plunge. They represent the first permanent changes suggested by a major stock market.
Customers complained that they were unable to reach their brokers, and traders said they were unable to reach each other.
"The record Nasdaq trading volumes of October have made clear the limitations of telephone access in the operation of our markets and the need to expand computer-to-computer execution of trades," said Joseph R. Hardiman, president of the NASD.
The NASD will submit its proposals to its members for comment and then to the Securities & Exchange Commission for approval.
The proposed rules focus on NASD's 540 market-markers -- the traders in individual firms who buy and sell stocks on behalf of clients -- and the use of the computerized Small Order Execution System.
That system permits computer trading, without voice contact, of up to 1,000 shares of a stock listed on the Nasdaq National Market System and up to 500 shares of a stock traded on other Nasdaq lists. The computer chooses the best price among the competing ones listed on the screen.
In the future, the NASD will require all market-makers to participate in the system. Under the current voluntary system, only 210 -- or less than half -- were participating.
In addition, it will be more costly for market-makers to drop out of trading. Dropouts, who currently can return immediately, will have to wait 30 days to get back in. More than half of the stocks in the small order system lost some of their market makers on Oct. 19 and 20.
Traders also would have to join the clearing house so that trades can be cleared automatically by computer, eliminating back-office paperwork.
The NASD also said it would keep the system operating in spite of what are called "crossed" or "locked" markets. A "locked" market results when the bid and asked prices are the same and a "crossed" market results when the bid and asked prices become reversed.
During October's furious trading, the computer frequently shut down trading in individual stocks when there were "crossed" or "locked" markets, adding to the confusion.
Patrick C. Ryan, chief trader at Johnston, Lemon & Co. and a member of the board of governors of the NASD, said that requiring all market-makers to take part in the small-order system would remove elements of unfairness from the present situation that place heavier burdens for executing orders on those who are members of SOES.
Ryan said he also favored the plan to keep market-makers out for 30 days if they drop out of trading. He said that some market makers drop out, wait until things quiet down and then come back two days later while "the rest of us stay in and get all the bad days."
"In my view it is wrong for market-makers to not be willing to provide liquidity for public orders, and selectively buy and sell when they want to," Ryan said.
The NASD proposals were developed in cooperation with the National Security Traders Association, representing 3,500 members of the trading community. Ryan is vice chairman.
Douglas F. Parrillo, senior vice president at NASD, said the proposals were rooted in an effort to avoid similar problems in the future.
"These were events that were not forseen ... but it could happen again. ... What we want to do is to be prepared if and when it happens again."