Arterial oxygen saturation ($SpO_2$) monitoring for newborns requires special attention in neonatal intensive care units (NICUs). Newborns have very low photo-plethysmogram (PPG) amplitudes and their body movements are difficult to contain. Hardware design and its associated signal processing algorithms should be robust enough so that faulty measurements can be avoided. In this study, improved designs were implemented to deal with low perfusion, motion artifact, and the influence of ambient light. Dynamic range was increased by using different LED intensities and a feedback system. To minimize the effects of motion artifact and to discard other unqualified data, four additional algorithms were used, which were based on dual-trace detection, continuity of DC level, morphology of PPG, and simultaneity check of $SpO_2$. Our $SpO_2$ system was tested with newborns with normal respiration in the NICU. Our system provided fast, real-time responses and 100% artifact detection was accomplished under 84% of $SpO_2$.