WASHINGTON -- With release of a

Securities and Exchange Commission

report showing stock market trading firms are flouting perhaps the most significant reform of recent years, some observers question whether the watchdog agency is helpless before a securities industry hellbent to follow its own course.

The answer, several knowledgeable SEC watchers said in the wake of the report: The agency has an overwhelming arsenal to turn on violators, but the machinery can turn slowly, and the agency's ultimate response is a matter of will, not tools.

"The SEC has the clout to do anything it wants to do," said a former high-ranking enforcement official now in private practice, who asked not to be identified.

In a report last week, the SEC blasted trading firms' compliance with rules on handling of investors'

limit orders. Limit orders -- which have become a favorite tool of individual investors -- are instructions to buy and sell at specific prices. Under reforms adopted in recent years, the interplay of limit order prices with prevailing market prices can produce better overall prices, reaping many millions for investors in cost savings or additional profits when they buy or sell.

"Wall Street generally is pretty smart," said Barry Barbash, a Washington attorney and former director of the SEC's investment management division. "Thumbing your nose at the SEC is not a way to live a happy existence. I don't think the industry is that brazen and that stupid."

He attributed the grim compliance report to "rules that are very monumental, and an industry trying to make a monumental effort.

"There's always a lag time," he said. At the same time, "the SEC is making clear they want a better job done, and quickly. The SEC has a lot of different ways it can take out its aggravation. If people don't get it, they're going to get it. This was a shot across the bow, that was pretty clear."

John C. Coffee Jr., a

Columbia University

law school professor active in securities matters, agreed the agency can eventually get what it wants, unless "some other crisis takes their attention," or staffing problems get in the way. Traditionally, the agency has been understaffed, he said, and has also found it difficult to retain experienced staff.