Tech Selloff Sends Stocks Into a Tumble : Trading: Selling frenzy overloads Nasdaq computer systems, prompting their shutdown. SEC will investigate.

NEW YORK — The Nasdaq Stock Market suffered a massive computer failure triggered by a huge selloff of technology stocks Monday, leaving thousands of investors unable to sell shares as prices plummeted.

Traders and institutional investors said the breakdown, which lasted more than an hour, was the most serious in a chain of computer failures that have dogged Nasdaq for months as the daily volume of shares traded has soared, although Monday’s volume was well short of a record.

“It was a nightmare morning for us,” said Andrew Schwarz, head of AGS Specialist Partners, an American Stock Exchange firm that trades options based on Nasdaq stocks. “All of a sudden people couldn’t execute orders on Nasdaq. When this sort of confusion takes place, I think it’s terribly damaging to the marketplace.”

Brandon C. Becker, director of the Securities and Exchange Commission’s division of market regulation, said the SEC will examine what happened. “It does concern us, and we will be looking into it,” Becker said.

Nasdaq shut down its two major computerized trading systems--the Small Order Execution System and Selectnet--beginning at 9:56 a.m. EDT after discovering that its systems were so overloaded that most computer terminals used by dealers were displaying stock prices that were 12 minutes out of date.

Nasdaq spokesman Marc Beauchamp said the exchange shut down SOES and Selectnet because “market makers [dealers] were unable to update their quotes”--the displayed prices at which they stand ready to buy or sell shares.

The main failure, he said, was the result of a flaw in Nasdaq’s new computer workstation, called Workstation II, which now represents 3,700 of the 5,200 computer terminals used by individual traders at dealer firms.

Nasdaq has been requiring firms to switch to the new terminals despite numerous complaints that they were not operating properly. Nasdaq disputes that the system is flawed.

According to Beauchamp, Nasdaq was allowing dealers on a case-by-case basis to cancel trades based on erroneous quoted prices.

*

Such a move would benefit the dealers but could leave individual investors with losses. That’s because investors who thought they had sold stock, for example, would suddenly discover that they still owned it, even though it was now valued well below the price at which they thought they had sold it.

He said six firms had asked to break trades, but he said he did not know how many trades were involved or how many Nasdaq would allow to be broken.

Beauchamp confirmed that as dealers discovered they couldn’t update their quotes, they jammed phone lines to Nasdaq’s computer operations center in Trumbull, Conn., asking for permission to stop making markets in Nasdaq stocks. Many couldn’t get through, he said, and several, in desperation, called Nasdaq’s media relations office to ask for help in reaching the computer center.

He said 54 of 500 dealer firms were given permission to temporarily shut down their market-making activities. He said he didn’t know how many stocks were affected. Each Nasdaq stock has more than one dealer, with more than 20 for very big stocks.

Nasdaq includes some of the largest high-technology companies, such as Microsoft, Intel and Apple Computer.

The selloff was pushed along by a wave of disappointing earnings for the high-tech companies and an unfavorable article in Barron’s. The Nasdaq composite index closed down 27.30 points at 984.74, a drop of 2.7%. Nasdaq volume Monday, at 387.6 million shares, was well below record levels because of the Columbus Day holiday.

Nasdaq has repeatedly shut down SOES and Selectnet for short periods in recent months because of computer overload. But Monday marks the first time Nasdaq publicly admitted that its computers had been displaying large numbers of inaccurate quotes.

Traders said that because of the glitches, computer displays showed “crossed markets” in scores of stocks. It was a situation in which a dealer’s displayed price at which it was offering to buy a stock was higher than the displayed price at which it was offering to sell--the reverse of what is normal.

Similar glitches occurred during the October, 1987, market crash. Nasdaq was severely criticized then for not maintaining orderly markets for small investors. The SOES system, designed to handle small-customer orders automatically, was put in place to remedy that, but SOES on Monday remained off-line from 9:56 a.m. until 11:05 a.m. EDT.

Nasdaq had heavily advertised itself as the “stock market for the next 100 years,” but it has admitted that it was unprepared for a surge in trading that began last spring. Some professional traders Monday criticized Nasdaq for not having moved sooner to update its trading systems.

Nasdaq contends that its computer problems will end once it finishes a $180-million computer upgrade due to be completed by the end of the year.

Nasdaq has no trading floor. It is made up of independent dealer firms linked by telephones and various computer systems.

Beauchamp said Monday’s problem was traced to a piece of equipment known as an “originator,” which handles computer traffic between Nasdaq’s mainframes and the Workstation II terminals.

*

With SOES and Selectnet shut down, dealers were still able to execute trades the old-fashioned way: by calling each other over the telephone. But with difficulties in coming up with accurate quotes, many trades were substantially delayed, and some customers, especially of smaller firms, for a time found themselves unable to trade at all.

Nasdaq and its parent organization, the National Assn. of Securities Dealers, are the subject of investigations by the SEC and the Justice Department’s antitrust division relating to suspected violations of trading rules by dealers.

The NASD also was strongly criticized recently, in a report issued by an independent committee headed by former Sen. Warren Rudman, for failing to keep up with the growth in trading.