WASHINGTON -- Bidding in the government bond market must be computerized to guard against the type of abuses disclosed by Salomon Brothers Inc., representatives of the National Association of Securities Dealers and the New York Stock Exchange said yesterday.

Testifying before the Senate Banking securities subcommittee, NASD President Joseph Hardiman called primary dealers' current bidding system "antiquated at best." It is "very easy" to set up a computerized bidding network that would keep track of bond prices and sales in both the primary and secondary markets, he said.

Edward Kwalwasser, executive vice president of the stock exchange, said an automated system would leave an "audit trail" of transactions by dealers and brokers that would greatly enhance the ability of federal regulators to monitor trading.

Mr. Kwalwasser also said securities firms on Wall Street "lost millions of dollars" when they were caught in the $12.2 billion two-year note squeeze engineered in May by Salomon Brothers. Traders got fired "because they looked stupid" when, in fact, they were victims of cheating, he added.

Salomon acquired $10.6 billion, or 86%, of the total issue of May notes when it submitted bids on behalf of itself and other customers.

The Treasury Department announced Wednesday that it is making several changes in the rules for the government bond market, including a procedure that will require winning dealers to verify their bids before settlement. The Treasury also said it is planning to introduce some automated bidding procedures early next year, but the department did not give any details.

"My guess is that we are capable with the use of electronic trading to open up the trading process," said Sen. Phil Gramm, D-Tex. "By limiting the ability of people to participate in the primary market ... we have created through regulation profits and lowered the efficiency of the marketplace."

"There's no question the present process gives the primary dealers an information advantage," replied Mr. Kwalwasser. "The more we can open that market up, the market ought to be more efficient."

Still, Mr. Kwalwasser cautioned that no matter what changes in the bidding process are put in place, traders will still seek to profit from holes in the system to gain.

Salomon Brothers was subject to a routine audit by the stock exchange in April, he said, but it would have been "extremely difficult" to pick up the abuses that have since come to light. Moreover, he noted, each day Salomon executes 8,000 trades and finances $25 billion in bond repurchase agreements.

Mr. Hardiman said NASD supports additional legislation that would allow securities dealers to set their own regulations for government securities. The organization also favors amending the Exchange Act to provide the SEC with authority to require all government bond dealers and brokers to report their quotations and trades to regulators.

Mr. Kwalwasser said the NYSE favors a system that would disclose sales and quotes by bond dealers but wants to wait until federal investigators report on their investigation of the Salomon Brothers scandal. The report is due sometime in December, when Congress probably will not be in session.

Ralph Horn, chairman of the Public Securities Association, endorsed automated bidding when he testified on Wednesday before the subcommittee. He also said the Treasury should use formal procedures, including holding public hearings, when it makes changes in the auction rules. Currently, the Treasury announces any such changes in press releases.

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