Joseph R. Hardiman, president of the National Association of Securities Dealers (NASD), has complained to Nicholas F. Brady, head of a presidential task force that investigated the Oct. 19 market crash, that the panel's criticisms of the over-the-counter market were "inaccurate" and "unfortunate."

In a three-page letter to Brady, Hardiman challenged the task force findings and charged that the staff relied on anecdotes from market participants while disregarding "substantial and contrary statistical evidence" that the market, called Nasdaq, operated efficiently.

Among the Brady statements that irritated Hardiman was one that said: "For many investors, both large and small, the over-the-counter market broke down when it failed to perform its function of providing liquidity for buyers and sellers, and many customer and dealer orders did not get promptly executed, if they were executed at all."

Hardiman's forceful rejection of the Brady findings and his defense Nasdaq was another sign of the widening controversy over why the market crashed and who was responsible.

Brady will be one of the lead-off witnesses Tuesday when the Senate Banking Committee opens four days of hearings into the market collapse. Hardiman is scheduled to appear before the committee on Thursday.

A report by the Securities and Exchange Commission, also due this week, could set off a new round of finger-pointing.

The Brady report also has drawn fire from John J. Phelan Jr., chairman of the New York Stock Exchange, who said he disagreed with the task force findings that many NYSE specialists, who bring buyers and sellers together on specific stocks, "appear not to have been a significant force" in leaning against the market's downward trend.

Hardiman said he planned in his testimony to review the events of Oct. 19, the problems faced by Nasdaq and the steps his organization has taken to tighten its controls over the 545 brokerage firms that buy and sell stocks, an activity called market making.

The Brady report hit hard at Nasdaq when it declared: "There are several ways in which the over-the-counter market failed to perform its function during the market break. These are the withdrawal from the market of market makers; the reduction by market makers in the depth of the markets made; failure of market makers to answer their telephones; widening of bid-offer spreads and the failure of the automated execution systems."

In his letter, Hardiman denied that the withdrawal by market makers from trading in individual stocks was a problem. Instead, he said, "The pruning back of the number of positions improved the effectiveness of market-maker trading operations."

Hardiman also said it was common in all markets for traders, confronted with heavy selling, to reduce the number of shares they were willing to buy and to widen the spreads between the prices at which they would buy and sell.

Moreover, Hardiman said, the computer system that handles orders under 1,000 shares did not fail, as suggested, but stopped operating in specific stocks when markets became "crossed" or "locked."

A "crossed" market occurs when bid and asked prices become reversed so that a market maker is listed as offering to pay more to acquire the stock than he is asking from potential buyers of his shares. A "locked" market takes place when bid and asked prices are the same. In either case, the software shuts down trading in the stock involved.

Hardiman did not address the question of whether traders failed to answer their phones to keep from having to buy stocks in a falling market -- a complaint that has been widely made. He has previously acknowledged that the huge flow of orders on Oct. 19 and 20 spotlighted a serious telephone access problem in the Nasdaq system.

For the over-the-counter market, widely advertised as "the stock market of tomorrow," the telephone, rather than the computer, turned out to be its Achilles heel.

Across the nation, customers could not reach brokers, brokers could not get through to traders and traders could not talk to each other. Thousands of orders went unexecuted.

At Ferris & Co., a regional brokerage firm in Washington, traders spent hours trying to get through to New York brokerage firms. "In one two-hour period, we had only three or four answers," said President George M. Ferris Jr.

Jackson P. Bayer, head of trading in over-the-counter securities at Oppenheimer & Co. in New York, also recalled severe telephone problems on Oct. 19.

"It was chaos," said Bayer, whose trading desk is linked to the outside world by 150 phone lines. "It looked like a disco in here," he said. "Every phone was lit up."

Hardiman, in his letter to Brady, also pointed to Brady's figures showing that Nasdaq trading fell sharply when compared to New York Stock Exchange volume during the week of Oct. 19. The Brady report said the figures tended to confirm that it was harder to trade in the Nasdaq market than on the NYSE.

Hardiman said the reason the Nasdaq percentage declined was that program trading and portfolio insurance activities involve chiefly blue-chip NYSE stocks, not Nasdaq stocks. As a result, the NYSE volume climbed more sharply. Hardiman said Nasdaq did better than the NYSE in many areas of trading during the market crash.

Trying to stay a step ahead of the official investigations into the crash, the NASD has moved rapidly to try to repair the damage to its market image and tighten its operations.

The changes have created considerable controversy in NASD ranks, especially with smaller firms that do not like the proposed policy changes.

On the technical side, Nasdaq has provided traders with an electronic messaging system that allows them to bypass the telephone. Computer software changes will allow trading to continue even in "crossed" or "locked" markets.

On the policy side, market makers will be required to stay in the game, even when the action gets heavy and the trading becomes costly. A new rule says that a market maker who drops out will have to stay out for 20 business days.

Nasdaq market-making firms also will have to trade minimum amounts of shares, which will increase the amount of capital some traders will need.

The new NASD rules were sent to the SEC last week for approval but are not expected to become effective until April or May.

The adequacy of capital became a source of concern in the Nasdaq market during the week of Oct. 19, just as it did on the NYSE, where the money available to specialists was severely drained by two 600-million-share days. Federal Reserve intervention with banks was needed to make more capital available to specialists.

Capital questions may be addressed in the forthcoming SEC study. SEC Chairman David S. Ruder said in November, "We will look closely at the adequacy of dealer capital to cope with increased volume and volatility and hope to suggest means for making more capital available."

"I think the amount of capital a market maker or specialist has {available} does impact on his decision to {take a} position in more securities," Hardiman said. "And that if more capital had been available to the specialist as well as to the market makers, the volatility may not have been as great."

"My surmise is that we're going to increase the capital requirements," he added.

Hardiman said, however, that no amount of capital could have stopped the market's "free-fall" on Oct. 19. His sentiments were echoed by others in the industry.

One of the key problems faced by market makers, said Patrick C. Ryan, chief trader at Johnston, Lemon & Co. in Washington, was that much of their capital was tied up by events in the market prior to Oct. 19.

On Oct. 14, 15 and 16, he noted, the Dow Jones industrial average dropped 261.42 points, and when the markets opened Oct. 19, traders already had absorbed large amounts of stock.

"It's one thing to have 100 percent of your capital available to you when the market goes down. But it's something else when you start by having 60 to 70 percent of your capital committed," he said.

As the market plunged, Ryan noted, traders were losing money both on the stocks they had purchased earlier and on the stocks they were buying even as they were falling.

Emanuel (Buzz) Geduld, president of Herzog, Heine, Geduld of New York, a wholesale firm that trades 4,000 stocks, replied, "Absolutely not," when asked whether the market events on Oct. 19 would have been altered if market makers had had considerably more capital.

"We experienced an absolute panic of sellers," he said. "I've been in the business for 19 years and I've never seen anything like it."

Bruce Abbott, chief trader at Ferris & Co., said that the overwhelming sell orders prompted some traders to hesitate to act.

"If you know you are going to buy it cheaper five minutes later, you're not thinking of making a stand with what capital you have," he said.

While the NASD has several ways to determine how much money a firm needs to trade stocks, a small company could trade a few stocks for only $25,000. That figure would be raised to $100,000 under a proposal being considered by the NASD. Larger trading operations are required to have sums in the millions of dollars.

For example, a regional firm that trades 50 stocks might have $1 million available for its trading department. At Shearson Lehman Hutton Inc., Peter J. DaPuzzo, head of equity trading, said his firm now trades 2,750 stocks and has $150 million to support the operation.

DaPuzzo said that under pressure of the selling wave, his firm expanded its capital commitment to stocks to more than $200 million. While many firms also added capital to the Oct. 19 trading, some firms apparently were unable to do so and dropped out.

The proposed NASD rules for tightening the financial and operational commitments of the 545 market makers to trading stocks and to automatic order systems are not universally popular. Some NASD members have complained that the rules discriminate against small firms.

"You can't legislate liquidity," declared several opponents.

Gerald A. Horwitz, chief executive officer of Horwitz, Schakner & Associates, Skokie, Ill., wrote:

"I am deeply disturbed when an overreaction occurs to an emotional event, and that's exactly what I think is happening ... I also have fears that the small broker-dealer, which is the backbone of our industry, will not be able to participate in the market-maker activities which are so crucial to our industry."

Greg Eilers, vice president of Heiner & Stock of Minneapolis, Minn., said the new rules might force a small firm to avoid becoming a market maker in a specific stock. "If we are asked to choose between providing liquidity as a market maker and losing money, we would, as we believe any firm would, drop the market."