[Federal Register Volume 64, Number 178 (Wednesday, September 15, 1999)]
[Notices]
[Pages 50126-50128]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-23991]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-41843]


Securities Exchange Act of 1934; Application Pursuant to Section 
11A(a)(3)(B) of the Securities Exchange Act of 1934; Order

September 8, 1999.
    Notice is hereby given that the American Stock Exchange LLC 
(``AMEX''), the Chicago Board Options Exchange, Inc. (``CBOE''), the 
Pacific Exchange Inc. (``PCX''), and the Philadelphia Stock Exchange, 
Inc. (``PHLX'') have sought an order pursuant to Section 11A(a)(3)(B) 
of the Securities Exchange Act of 1934 (the ``Act'') \1\ expressly 
authorizing them and the New York Stock Exchange (``NYSE''), by and 
through their members, affiliated member associations, the Securities 
Industry Automation Corp. (``SIAC''),\2\ the Options Price Reporting 
Authority (``OPRA''),\3\ and the International Securities Exchange 
(``ISE'') (``Participants''),\4\ to act jointly in planning, developing 
and discussing approaches and strategies with respect to options quote 
message traffic to (1) recommend and propose, individually or jointly, 
self-regulatory organization or Commission rules or plan amendments in 
connection therewith, or (2) undertake other options quote message 
traffic mitigation strategies.
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    \1\ Section 11A(a)(3)(B) authorizes the Commission, in 
furtherance of its statutory directive, to facilitate the 
establishment of a national market system, by rule or order, ``to 
authorize or require self-regulatory organizations to act jointly 
with respect to matters as to which they share authority under [the 
Act] in planning, developing, operating or regulating a national 
market system (or a subsystem thereof) or one or more facilities 
thereof.''
    \2\ SIAC is a registered exclusive securities information 
processor and is owned by the AMEX and the NYSE. Securities Exchange 
Act Release No. 12035 (Jan. 22, 1976), 41 FR 4372.
    \3\ OPRA is an association governed by a committee consisting of 
representatives of the four national securities exchanges authorized 
by the Commission to list options for trading (the AMEX, the CBOE, 
the PCX, and the PHLX) and the NYSE (which no longer lists options 
for trading and whose role in these matters accordingly may be 
limited). In 1976, the Commission granted its registration as a 
securities information processor. Securities Exchange Act Release 
No. 12035 (Jan. 22, 1976), 41 FR 4372. OPRA was formed and operates 
pursuant to a plan approved by the Commission on March 18, 1981, as 
amended. Securities Exchange Act Release No. 17638, as amended. See, 
e.g, Securities Exchange Act Release No. 40767 (Dec. 16, 1998), 63 
FR 69354.
    \4\ The ISE, which has filed an application with the Commission 
to register as a national securities exchange, also will be 
participating in the SRI study. Securities Exchange Act Release No. 
41439 (May 24, 1999), 64 FR 29367 (Jun. 1, 1999).

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[[Page 50127]]

I. Background

    SIAC, which manages the gathering, processing, and dissemination of 
option exchanges' bid and quote information for OPRA, and Stanford 
Research, Inc. Consulting (``SRI'') are conducting a study to address 
issues raised by an anticipated increase in options message traffic. 
OPRA has experienced substantial and accelerating growth in peak 
message rates. SIAC and SRI attribute this growth to the listing of new 
options (including the listing of new options series), the development 
of new products, and the growth in on-line trading.
    There also are a number of anticipated market events that OPRA 
believes and SIAC and SRI estimate could result in a seven-fold 
increase in peak message traffic above normal baseline forecasts. These 
market events include decimalization and the increase in multiple 
listings, as well as the anticipated entry into the options markets of 
the ISE and the related increase in multiple listings.
    This anticipated increase in options quote message traffic has 
implications for the options industry and the continued maintenance of 
fair and orderly markets for investors. For example, it creates issues 
for OPRA concerning its data management and processing capacity. It 
also creates issues for OPRA's data recipients and vendors concerning 
whether they have the infrastructure to receive and disseminate OPRA 
data. Finally, it creates issues concerning the quality of the market 
data OPRA likely will be able to generate.
    The SIAC and SRI project study is intended to: (1) Identify 
potential options quote message traffic mitigation strategies and quote 
triage approaches; (2) gauge the feasibility of those strategies 
through options industry interviews; and (3) analyze and evaluate 
various approaches.
    The project structure includes a Project Steering Committee with 
representatives of self-regulatory organizations, as well as other 
participants in the securities markets or industry, and the Commission 
staff. It is expected that SIAC and SRI will gather information from 
the membership of the Project Steering Committee and that self-
regulatory organizations will work together to assist SRI in conducting 
the study.
    By letter dated August 26, 1999, the AMEX, CBOE, PCX, and PHLX have 
asked the Commission to authorize expressly by order such joint 
discussions and joint action by the Participants, consistent with 
Section 11A of the Act.\5\
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    \5\ Letter from Colleen Mahoney to Jonathan Katz, dated August 
26, 1999, attached as Exhibit A.
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II. Discussion

    Section 11A(a)(2) of the Act directs the Commission, having due 
regard for the public interest, the protection of investors and the 
maintenance of fair and orderly markets, to use its authority under the 
Act to facilitate the establishment of a national market system for 
securities. In exercising its authority to facilitate the establishment 
of a national market system, the Commission must protect the public 
interest in maintaining fair and orderly markets in the face of new 
technology and other significant market developments.\6\ As part of its 
authority to facilitate the establishment of a national market system, 
Congress gave the Commission the authority to authorize or require by 
order the self-regulatory organizations ``to act jointly * * * in 
planning, * * * operating, or regulating a national market system.'' 
\7\ This authority is intended, among other things, to enable the 
Commission to require joint activity that otherwise might be asserted 
to have an impact on competition, where the activity serves the public 
interest and the interests of investors. Pursuant to its Section 
11A(a)(2) and Section 11A(a)(3)(B) authority, on March 18, 1981, the 
Commission approved the OPRA Plan.
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    \6\ See generally, Section 11A(a)(1)(B) of the Act, 15 U.S.C. 
78k-1(a)(1)(B) and Section 11A(a)(1)(C) of the Act, 15 U.S.C. 78k-
1(a)(1)(C).
    \7\ Section 11A(a)(3)(B) of the Act, 15 U.S.C. 78k-1(a)(3)(B).
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    The Commission is concerned about the increase of options quote 
message traffic that may result from various anticipated events in the 
options markets. The proposed SICA/SRI study will provide important 
information about how to address this increase in options quote message 
traffic. To achieve the goals of the study, it will be essential for 
the Participants to work jointly with each other and with SIAC and SRI 
to provide relevant information and to discuss the feasibility of 
strategies to avoid quote traffic congestion, including quote 
mitigation strategies and increasing capacity, and individual or joint 
action with respect to such strategies for ultimate approval and 
implementation. The Commission believes that such joint discussions and 
joint action are unlikely to have adverse effects on competition and 
that any incidental effects on competition will be outweighed by their 
benefits to the public interest and the interests of investors. In this 
respect, the Commission notes that the parties seeking this Order have 
represented that the joint discussions contemplated by this Order will 
be limited to strategies to avoid quote traffic congestion, including 
quote mitigation strategies and strategies to increase capacity, in 
response to the increase in options quote message traffic. In addition, 
this Order covers only discussions in the presence of Commission staff 
or actions that are approved by the Commission. For that reason, the 
Commission staff will attend all joint discussions and will participate 
in developing approaches in response to anticipated increases in 
options quote message traffic.
    The Commission finds that the public interest in maintaining fair 
and orderly markets is furthered by requiring the Participants to work 
jointly to evaluate issues resulting from increased message traffic and 
to develop and recommend strategies to address problems resulting from 
that increase. The Commission notes that there are various contexts in 
which market participants are required by law to cooperate to achieve 
certain national market system objectives. The Commission expects that 
this cooperation will continue and does not require additional 
authorization by the Commission. The Commission is issuing this Order 
only because of recent and expected changes in the options markets, the 
need for prompt development of appropriate response to those changes, 
and the concerns expressed by some Participants about their ability to 
meet collectively to address this situation.
    Accordingly, the Commission has determined to issue an order 
directing the Participants to cooperate with each other and to conduct 
joint discussions and to take such joint action as is necessary or 
advisable to plan and develop recommended strategies and approaches 
with respect to anticipated increases in options quote message 
traffic.\8\
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    \8\ The Commission reaches this conclusion without in any way 
considering or deciding whether the conduct expressly authorized by 
this Order is within the scope of the Commission's March 1981 Order 
approving the OPRA plan, as amended.
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    It is hereby ordered, pursuant to Section 11A(a)(3)(B) of the Act, 
that the AMEX, CBOE, NYSE, PCX, and PHLX, on their own behalf and 
acting through their members, affiliated member associations, SIAC, and 
OPRA, are directed to act jointly in planning, developing, and 
discussing approaches and strategies with respect to options quote 
message traffic (including, in particular, by participating in the SRI 
study) to (1) recommend and propose,

[[Page 50128]]

individually or jointly, self-regulatory organization or Commission 
rules or plan amendments in connection therewith, or (2) undertake 
other strategies to avoid quote traffic congestion, including options 
quote traffic mitigation strategies and strategies to increase 
capacity. To the extent this Order may be construed as reflecting a 
Commission finding that a particular discussion or action has no 
adverse effect on competition, or that any such adverse effect is 
outweighed by the benefits to the public interest and the interests of 
investors, that finding is limited to discussions in the presence of 
the Commission staff or actions formally approved by the Commission.\9\
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    \9\ In issuing this Order, the Commission intends to address 
only the circumstances the Order expressly discusses. The Commission 
believes that it would be inappropriate to draw any inference from 
this Order concerning the Commission's views as to any conduct or 
circumstance not addressed by the Order. In particular, other than 
as described in this Order, the Commission expresses no conclusion 
on any issue concerning joint conduct, whether occurring before or 
after the date of this Order, or concerning the circumstances under 
which the Commission would view such joint conduct as in the public 
interest and the interests of investors.
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    It is hereby further ordered that this Order will be effective 
until such time as the Commission adopts such rules or plan amendments 
or September 1, 2000, whichever is earlier.

    By the Commission.
Margaret H. McFarland,
Deputy Secretary.

Exhibit A

August 26, 1999.
Jonathan Katz, Secretary, Securities and Exchange Commission, 450 
Fifth Street, NW, Washington, DC 20549

    Dear Mr. Katz: The Securities Industry Automation Corp. 
(``SIAC'') and Stanford Research, Inc. Consulting (``SRI'') have 
been asked to conduct a study at the request of the Options Price 
Reporting Authority (``OPRA'') to address issues raised by an 
anticipated increase in options message traffic.
    On behalf of the American Stock Exchange LLC, the Chicago Board 
Options Exchange, Inc., the Pacific Exchange, Inc. and the 
Philadelphia Stock Exchange, Inc., all of which are participants in 
OPRA, we hereby request that the Securities and Exchange Commission 
exercise its authority under Section 11A of the Securities Exchange 
Act of 1934 (the ``Act'') to issue an order expressly authorizing 
the self-regulatory organizations, including without limitation the 
OPRA participants, on their own behalf and through their members and 
member associations, to act jointly with each other and with SIAC in 
planning, developing and discussing applications and strategies with 
respect to options quote message traffic, in order to individually 
or jointly recommend and propose individual or joint self-regulatory 
organization or Commission rules or plan amendments in connection 
therewith or to undertake other options traffic mitigation 
strategies.
    On March 18, 1981 the Commission approved the OPRA Plan. See 
Securities Exchange Act Release No. 17638 (March 18, 1981). The OPRA 
Plan, as amended, was developed:

in response to directives of the Securities and Exchange Commission 
that provision be made for the consolidated reporting of 
transactions in eligible options contracts * * * and in response to 
the finding set forth in [the Act], that it is in the public 
interest and appropriate for the protection of investors and the 
maintenance of fair and orderly markets to assure the availability 
to brokers, dealers and investors of information with respect to 
quotations for and transactions in securities.
    The OPRA Plan was designed to enable the OPRA participants, 
through OPRA, to ``make all policy decisions under the Plan, 
including, but not limited to * * * setting standards governing the 
method and format for reporting options last sale reports and 
quotation information by [the national exchanges, among others].'' 
See Securities Exchange Act Release No. 34-40767 (Dec. 16, 1998), 63 
Fed. Reg. 69354. The SIAC/SRI conducted study is intended to address 
strategies for dealing with the anticipated increase in options 
quote message traffic, and, accordingly, will require consideration 
of policies and standards for managing quotation message traffic.
    The OPRA participants believe that their joint action in 
connection with the SIAC/SRI study is encompassed by the approved 
OPRA Plan. Nonetheless, we request that the Commission authorize 
expressly, by separate order, such joint discussions and joint 
action by the self-regulatory organizations, including without 
limitation the OPRA participants, on their own behalf and through 
their members and member associations, consistent with Section 11A 
of the Act, in order to eliminate any possible question that might 
arise as to the authority of the OPRA participants on their own 
behalf and through their members to cooperate with each other and 
with SIAC and SRI to conduct joint discussions and to take such 
joint action as is necessary or advisable to plan and develop 
recommended strategies and approaches with respect to anticipated 
increases in options quote message traffic or undertake other 
options traffic mitigation strategies.
    We have enclosed a draft order that has been the subject of 
discussions with Commission staff.

    Sincerely,
Colleen P. Mahoney
Enclosure

[FR Doc. 99-23991 Filed 9-14-99; 8:45 am]
BILLING CODE 8010-01-M