[Federal Register Volume 65, Number 91 (Wednesday, May 10, 2000)]
[Notices]
[Pages 30148-30154]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-11680]



[[Page 30148]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-42755; File No. 4-434]
RIN 3235-AH92


Options Price Reporting Authority

AGENCY: Securities and Exchange Commission.

ACTION: Proposed amendments to national market system plan.

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SUMMARY: The Securities and Exchange Commission (``SEC'' or 
``Commission'') is proposing amendments to the Options Price Reporting 
Authority (``OPRA'') Plan for Reporting of Consolidated Options Last 
Sale Reports and Quotation Information (``OPRA Plan''). The proposed 
amendments set forth two alternatives to establish a formula to 
allocate the message capacity of the OPRA system among the participant 
exchanges. The allocation formula is intended as a short-term solution 
to OPRA capacity shortages.

DATES: Comments should be submitted by June 9, 2000.

ADDRESSES: All comments should be submitted in triplicate and addressed 
to Jonathan G. Katz, Secretary, U.S. Securities and Exchange 
Commission, 450 Fifth Street, NW, Washington, DC 20549-0609. Comments 
also may be submitted electronically at the following E-mail address: 
[email protected]. All comment letters should refer to File No. 4-
434; this file number should be included on the subject line if E-mail 
is used. Comment letters will be available for inspection and copying 
in the public reference room at the same address. Electronically 
submitted comment letters will be posted on the Commission's Internet 
web site (http://www.sec.gov).

FOR FURTHER INFORMATION CONTACT: Deborah Flynn, Senior Special Counsel, 
at (202) 942-0075, Kelly Riley, Attorney, at (202) 942-0752, John 
Roeser, Attorney, at (202) 942-0762, Terri Evans, Special Counsel, at 
(202) 942-4162, and Heather Traeger, Attorney, at (202) 942-0763, 
Division of Market Regulation, Securities and Exchange Commission, 450 
Fifth Street, NW, Washington, DC 20549-1001.

SUPPLEMENTARY INFORMATION: The Commission is proposing amendments to 
the OPRA Plan \1\ to allocate among the options exchanges OPRA's peak 
period message handling capacity. An allocation formula is needed 
because of OPRA's inability to increase its systems capacity within the 
short-term. Without sufficient capacity, options market data are 
delayed and, therefore, stale, which reduces market transparency and 
hampers efficient price discovery. When this occurs, the only market 
participants with up-to-date quote and trade information are those 
physically on the floor of a particular exchange. Those participants 
then have an informational advantage that is inconsistent with the goal 
of a fair and open market for all investors.
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    \1\ 1 OPRA is a National Market System Plan approved by the 
Commission pursuant to Section 11A of the Act and Rule 11Aa3-2 
thereunder. See Securities Exchange Act Release No. 17638 (March 18, 
1981).
    The OPRA Plan provides for the collection and dissemination of 
last sale and quotation information on options that are traded on 
the participant exchanges. The five exchanges that agreed to the 
OPRA Plan are the American Stock Exchange (``Amex''); the Chicago 
Board Options Exchange (``CBOE''); the New York Stock Exchange 
(``NYSE''); the Pacific Exchange (``PCX''); and the Philadelphia 
Stock Exchange (``Phlx'').
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    Consolidated options data offer enormous benefits to investors and 
the markets. The Commission is working with the OPRA participants to 
increase the capacity of the consolidated data systems and to empower 
the markets to individually ensure adequate data capacity in the 
future. In the meantime, an objective capacity allocation formula is 
essential to ensure that scarce OPRA systems capacity is allocated 
among the options exchanges on a fair and reasonable basis and that 
delays in the dissemination of options market data to the public are 
minimized.
    An equitable allocation of capacity should ensure that all broker-
dealers and investors have available to them accurate and timely 
information with respect to quotations for and transactions in options 
and would help to avoid delays and queues in the dissemination of 
options market information. The OPRA Plan participants have been unable 
to formulate an objective capacity allocation model. The Commission, 
therefore, is proposing these amendments to the OPRA Plan on its own 
initiative, pursuant to Section 11A under the Securities Exchange Act 
of 1934 (``Act'') \2\ and Rule 11Aa3-2 thereunder,\3\ and is seeking 
comment from interested persons.
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    \2\ 15 U.S.C. 78k-1.
    \3\ Rule 11Aa3-2 establishes procedures for initiating or 
approving amendments to national market system plans such as the 
OPRA Plan. Paragraph (b)(2) of Rule 11Aa3-2 permits the Commission 
to propose amendments to an effective national market system plan. 
Further, Paragraph (c)(2) of Rule 11Aa3-2 requires that promulgation 
of an amendment to an effective national market system plan 
initiated by the Commission be by rule. See 17 CFR 240.11Aa3-
2(c)(2).
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I. Background

    In 1981, the Commission approved the OPRA Plan as a national market 
system plan, pursuant to Sections 11A(a)(2) and 11A(a)(3)(B) of the 
Act.\4\ The OPRA Plan governs the process by which options market data 
are collected from participant exchanges, consolidated, and 
disseminated.\5\ Consolidated data help ensure that broker-dealers, 
markets, and investors have the best prices available for an option, 
from all markets trading that option class. It assists customers in 
setting the terms of their orders and in monitoring how well their 
brokers execute their orders. Consolidated data also assist brokers and 
markets in providing the best execution possible for an order.
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    \4\ 15 U.S.C. 78k-1(a)(2) and (3)(B); see also Securities 
Exchange Act Release No. 17638 (March 18, 1981), as amended; see, 
e.g., Securities Exchange Act Release No. 40767 (December 9, 1998), 
63 FR 69354 (December 16, 1998).
    \5\ OPRA was granted registration as a securities information 
processor by the Commission in 1976. See Securities Exchange Act 
Release No. 12035 (January 22, 1976), 41 FR 4372.
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    Current OPRA participants include: Amex, CBOE, PCX, Phlx, and 
NYSE.\6\ A policy committee composed of representatives from each 
participant exchange implements and, subject to Commission approval, 
amends the policies and procedures set forth in the OPRA Plan. This 
committee selected the Securities Industry Automation Corporation 
(``SIAC'') as the facility for gathering the last sale and quote 
information from each of the participant exchanges and consolidating 
and disseminating it to approved vendors. All of the transactions 
executed on, and price quotations for options generated by, each 
options exchange are communicated to the public by OPRA through the 
facilities of its exclusive processor, SIAC. The messages are sent to 
OPRA and distributed to market data vendors on a consolidated basis for 
use by options market participants, including retail investors, broker-
dealers, and the exchanges themselves.
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    \6\ The NYSE sold its options business to the CBOE in 1997. 
Nevertheless, the NYSE remains a participant of OPRA. The 
International Securities Exchange is seeking to become an OPRA 
participant.
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A. Systems Capacity

    Each trade that is executed on an options exchange, as well as each 
price change quoted on an options exchange, is reported to OPRA as a 
``message.'' The options markets generate messages for a substantial 
number of products. Currently, there are approximately 3,300 equity 
securities and indexes underlying listed options products, and

[[Page 30149]]

more than 140,000 individual options series.\7\ Trade and quote data 
are generated continuously during the hours that markets are open for 
each options product listed on each options exchange.
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    \7\ A series is a class of options, either all puts or all 
calls, on the same underlying security that have the same exercise 
price and maturity date.
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    Quote message traffic represents the vast majority of the options 
message traffic generated.\8\ Generally, quotes are generated 
automatically for individual options series based on changes in the 
underlying stock price or index value. In other words, every time a 
price changes for a particular equity security, the quotes for all of 
the options on that security or an index in which that security is 
represented are automatically updated on each exchange that trades 
those options. This enormous amount of quote message traffic is 
burdening the OPRA system, which threatens to compromise the 
reliability of options market data disseminated to market participants, 
including retail investors.
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    \8\ For example, in February 2000, the average number of quotes 
per day was 37.5 million and the average number of trades per day 
was 183,000.
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    The number of messages generated by the exchanges on a daily basis 
has been growing exponentially. In January 1999, OPRA reported an 
average of only about 17 million messages per day. By January 2000, 
OPRA reported an average of 40 million messages per day. And, on April 
4, 2000, OPRA reported 74.3 million messages.\9\
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    \9\ As discussed below, this tremendous increase in message 
traffic may be attributed, in part, to the increase in multiple 
listing of previously exclusively-traded option classes that began 
in August 1999.
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    A more significant gauge of the level of options market data is 
messages per second. Messages per second, or ``MPS,'' is just that--the 
number of messages (i.e., options trade and quote data) reported to 
OPRA by the options exchanges during any given second of a trading day. 
The increases in this gauge have been nothing less than staggering. 
Between January 1998 and January 1999, OPRA reported an increase in one 
and five minute peaks from approximately 600 messages per second to 
approximately 1,400 messages per second. By January 2000, OPRA's 
reported one and five minute peaks reached approximately 2,900 messages 
per second. Currently, the exchanges are hitting OPRA's current systems 
capacity of 3,540 messages per second on an almost daily basis.
    In the past, OPRA had generally been able to handle the peak 
messages per second generated by the exchanges. In January 1998, OPRA 
had systems capacity to handle 600 messages per second, with plans to 
upgrade its systems to handle more messages per second. In January 
1999, OPRA had capacity to handle 1,900 messages per second and thus, 
was not in immediate danger of a system overload based on the peak 
messages per second reported. In January 2000, however, OPRA systems 
only had capacity to handle approximately 3,000 messages per second, 
which was dangerously close to being met.\10\
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    \10\ For example, on January 5, 2000, SIAC reported a one-minute 
peak of 2,970 MPS and on January 25, 2000, SIAC reported a five-
minute peak of 2,868 MPS.
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    The significant increase in message traffic may be attributed to 
increased volume on the exchanges, increased volatility in the 
underlying equity securities, and increased multiple trading of 
previously exclusively-traded options products across the options 
exchanges. Dramatic growth in options quote message traffic is expected 
to continue in the near future as a new exchange enters the market,\11\ 
products begin to trade in decimals rather than fractions, and quotes 
are disseminated with size.\12\ The combination of these factors could 
result in a peak MPS rate as high as 38,000 MPS by the end of 2001, a 
ten-fold increase over existing capacity.
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    \11\ The International Securities Exchange (``ISE'') was 
registered as a national securities exchange for options trading on 
February 24, 2000. See Securities Exchange Act Release No. 42455, 65 
FR 11387 (March 2, 2000).
    \12\ Currently, unlike quotes for equity securities, options 
price quotes currently are disseminated without size. Options quotes 
are expected to be disseminated with size in January 2001.
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B. OPRA's Capacity Initiatives

    As options message traffic has increased exponentially over the 
last few years, OPRA has directed SIAC to implement technological 
updates to accommodate the additional message traffic. Over the last 
year, however, it has become increasingly apparent that the message 
traffic expected to be generated by the options exchanges cannot be 
accommodated by the planned enhancements to the OPRA system.
    In response to the systems capacity problems, OPRA, SIAC, as well 
as the options exchanges and their members, have worked to develop 
strategies to mitigate quote message traffic. In 1999, SIAC, at the 
request of the Commission, retained Stanford Research Institute 
(``SRI'') to conduct a study and to recommend possible strategies aimed 
at mitigating the amount of options quote message traffic.\13\ As part 
of this study, the options exchanges (including ISE), SIAC, OPRA, and 
the Securities Industry Association (``SIA'') met over a period of six 
months to attempt to develop quote reduction and mitigation strategies.
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    \13\ On September 8, 1999, the Commission ordered the options 
exchanges to participate in the SRI quote mitigation study and to 
act jointly to develop quote mitigation strategies. Commission staff 
attended all meetings of this group. See Securities Exchange Act 
Release No. 41843 (September 8, 1999), 64 FR 50126 (September 15, 
1999).
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    A number of alternatives to reduce options message traffic were 
considered and SRI's findings were presented to Commission staff on 
December 14, 1999. To date, the options exchanges have, individually, 
implemented a number of internal mitigation strategies. The Commission 
expects the options exchanges to continue to consider other mitigation 
strategies that could be implemented as both long-term and short-term 
solutions. Nonetheless, quote traffic has continued to strain OPRA 
capacity.

II. Discussion

A. Purpose of the Proposed OPRA Plan Amendment

    As discussed above, the Commission is greatly concerned about the 
lack of available OPRA systems capacity to accommodate the current and 
anticipated levels of options message traffic generated by the options 
exchanges. The Commission is concerned about the ability of OPRA to 
disseminate options market data on a real-time basis during times of 
high message traffic or high volatility in the equity markets. During 
these times, when systems capacity is stretched to the limit, OPRA data 
feeds may begin to queue, leading to the dissemination of stale market 
data to market participants. The Commission is concerned that without 
access to current market information, investors and other market 
participants will be unable to make informed options trading decisions.
    To address mounting capacity problems, novel ways of obtaining 
adequate capacity to support the industry's continued growth will need 
to be identified, evaluated, and implemented. The Commission recognizes 
that wholesale changes to the manner in which capacity is obtained will 
not occur overnight. Therefore, the options markets must continue to 
work within the existing capacity infrastructure for the short-term.
    The options exchanges have responded to this capacity crisis by 
agreeing to allocate existing OPRA systems capacity among themselves

[[Page 30150]]

during peak periods,\14\ while continuing to work on other short-term 
mitigation strategies, including delisting classes with little or no 
open interest and developing a cabinet for inactive options 
classes.\15\ To date, the options markets have reluctantly agreed, on 
three occasions, to allocate the existing OPRA capacity among 
themselves during peak periods through temporary amendments to the OPRA 
Plan.\16\ The capacity allocation used by the exchanges has been based 
loosely on the historical peaks experienced by each options market, and 
determined through negotiations among the markets. Despite repeated 
urgings by Commission staff, the options exchanges have been unable to 
formulate an equitable, more objective capacity allocation model, which 
would include incentives for the exchanges to reduce the excessive 
quoting of existing listings or to add new listings only with a sound 
business rationale. The Commission notes that each exchange has 
represented that the total messages per second allocated to it are 
insufficient to address its capacity needs. The Commission is concerned 
that the exchanges may be unable or unwilling to continue to allocate 
scarce OPRA capacity among themselves in the near future. The 
Commission believes the queuing that would undoubtedly result is 
unacceptable because all market participants would be subjected to 
unreliable market data, including stale quotes.
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    \14\ During peak periods when capacity caps are imposed on the 
exchanges, the Commission believes that it is unacceptable for any 
options exchange to generate message traffic in excess of the level 
allocated to it pursuant to an approved OPRA Plan amendment. An 
exchange that transmits message traffic through inbound OPRA lines 
in excess of its allocation will cause queuing in the OPRA system, 
and consequently, will result in the dissemination of unreliable 
market data to all market participants, including retail investors. 
The options markets should take whatever steps are necessary to 
prevent delays in their quotes stream processed by OPRA. If an 
options exchange inadvertently generates and transmits to OPRA 
message traffic in excess of its allocation, the Commission expects 
that the exchange will notify the public that it has exceeded its 
established allocation and as a result, its disseminated quotes are 
likely to be unreliable.
    \15\ A cabinet would effectively inactivate those options 
classes placed in the ``cabinet,'' so that the options exchanges 
would provide quotes to market participants only upon specific 
request, rather than disseminating continuous, two-sided quotations.
    \16\ 16 See Securities Exchange Act Release Nos. 42328 (January 
11, 2000), 65 FR 2988 (January 19, 2000) (order approving File No. 
SR-OPRA-00-01); 42362 (January 28, 2000), 65 FR 5919 (February 7, 
2000) (order approving File No. SR-OPRA-00-02); and 42493 (March 3, 
2000), 65 FR 12597 (March 9, 2000) (order approving File No. SR-
OPRA-00-03).
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B. Two Alternative Proposed Capacity Allocation Models

    The Commission is proposing to amend the OPRA Plan to establish a 
capacity allocation formula to be used in the short-term to allocate 
OPRA systems capacity among the options exchanges during peak periods. 
The Commission is proposing the following two alternative allocation 
models.
1. Alternative A
    The first proposed capacity allocation model would allocate 
capacity during peak periods based on the average quotation volume of 
options classes listed on each exchange that have sufficient trading 
volume to meet a minimum threshold.\17\ The proposed formula rewards 
quoting efficiency and restricts the allocation of capacity to an 
exchange in a particular options class in which the exchange's trading 
volume does not exceed certain thresholds. The Commission proposes 
that, on a quarterly basis,\18\ OPRA would perform the required 
allocation calculation itself or contract with its processor or another 
third party to do so. The information necessary to calculate 
allocations pursuant to the proposed formula is based on quote and 
transaction data reported routinely to OPRA by the options exchanges 
pursuant to the OPRA Plan. OPRA would notify the options exchanges and 
the Commission of the specific allocations for peak periods that would 
be in place beginning one month after the calculation is made.
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    \17\ The Commission proposes to include in the allocation 
formula a requirement that the trading volume of an option class 
meet certain minimum thresholds on an exchange before that options 
class will be counted for purposes of that exchange's allocation. As 
discussed below, this minimum threshold requirement is intended to 
limit any potential incentive for an exchange to add new products 
solely to obtain an additional allocation of capacity, without 
seriously committing to compete for order flow in those classes.
    \18\ The Commission proposes that the calculation be made on a 
quarterly basis to take into consideration the potential effect of 
the expiration cycle on the average quoting frequency and trading 
volume in individual option classes. The calculations would be based 
on quoting and trading activity during a calendar quarter (e.g., 
January, February, and March) and the allocations would be effective 
beginning the second month following the end of the calendar quarter 
(e.g., May 1).
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a. Included Classes
    A critical element of the first Commission proposal is the concept 
that an exchange only receives a portion of the available capacity for 
those option classes in which the exchange's trading reaches some 
minimal threshold (``Included Classes'').\19\ The Commission is 
proposing that an options class be considered an Included Class for an 
exchange if during the three-month period, that exchange trades an 
average of: (i) 15 trades per day, if the class is multiply-listed, or 
(ii) 30 trades per day, if the class is exclusively-listed. Thus, an 
options exchange would receive capacity credit only for those options 
classes in which it exceeds these minimum levels of trading activity.
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    \19\ Proposed OPRA Plan Section III (m).
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    The Commission understands, however, that there are a number of 
ways to define the term Included Class. For this reason, the Commission 
is also seeking comment on several variations of the proposed 
definition. Specifically, the Commission seeks comment on whether the 
proposed 15/30 threshold levels are appropriate, or whether these 
thresholds should be lower or higher. For example, should an exchange 
only have to have an average one trade per day in a multiply-listed 
class for that class to be an Included Class? The Commission also seeks 
comment on the threshold for considering an exclusively traded options 
class as an Included Class. Specifically, should the minimum be on 
average 15 trades per day, or 45 trades per day, or another amount, 
rather than 30 trades per day as proposed? In addition, the Commission 
would like commenters' views on whether the exchanges should have the 
same average daily trading requirements for multiply-listed classes and 
exclusively-listed classes to be considered Included Classes. If 
commenters believe that multiply-listed and exclusively-listed options 
should be subject to the same minimum trading volume standard, the 
Commission seeks comment on what that standard should be. Finally, the 
Commission seeks comment on whether another measure, such as an 
exchange's average quarterly ratio of quotes-to-contract volume in an 
options class would be more appropriate to use for determining which 
classes are Included Classes for an exchange.
    To permit new entrants a fair opportunity to compete with existing 
exchanges, the Commission is also proposing that all options classes 
listed by a new options market be considered Included Classes for 9 
months. Only after the new exchange has been operating for nine months 
would the minimum threshold levels be applied in determining which 
options classes are Included Classes for purposes of the allocation of 
capacity.
    The Commission recognizes the highly competitive environment in 
which the options exchanges operate. As such, the Commission is 
carefully considering whether the proposed

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capacity allocation model should include any special protections for 
new listings.\20\ As the Commission strongly encourages competition 
both within and among the various options exchanges, a short-term 
``safe harbor'' was contemplated for new listings (e.g., three to six 
months), during which time the listing exchange would get credit 
towards its allocation for the new listing, even if it obtained little 
or no order flow in the particular class. The Commission's desire to 
provide a safe harbor for new listings was balanced against its concern 
about the potential that exchanges could abuse it by adding new 
listings merely to obtain a larger share of capacity and then, at the 
end of the established safe-harbor period, immediately delist those 
classes and add new listings. To limit this potential, the Commission 
proposes to include in the formula for capacity allocation only those 
options classes that meet the minimum trading levels. The Commission 
emphasizes that its proposal does not in any way limit the ability of 
the options exchanges to list new option classes. Instead, the proposed 
limits on what options classes are considered Included Classes, relate 
only to the extent to which a particular exchange would receive an 
allocation credit of capacity for a new listing.
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    \20\ The Commission defines an options class as a ``new'' 
listing if the listing exchange does not currently list that class, 
regardless of whether another options exchange has previously listed 
the same option class.
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b. Capacity Credit for Multiply and Exclusively Listed Options Classes
    For each options class that is listed on more than one exchange, an 
exchange for which such class is an Included Class would be allocated 
capacity based on the average quoting frequency during the first half-
hour of the trading day after the opening rotation across all exchanges 
for which such class is an Included Class. By allocating capacity based 
on the average level of quoting across the exchanges trading a 
particular option class, the Commission intends to encourage quoting 
efficiency in multiply-traded classes. For options classes listed on 
only one exchange, an exchange would be allocated capacity based on the 
average quote traffic generated within the first half-hour of trading 
after the opening rotation, if the exchange's trading volume was 
sufficient for that class to be an Included Class.\21\ The Commission 
seeks comment as to the propriety of determining the average quoting 
frequency of multiply-traded and exclusively-traded options classes 
based on the quoting activity occurring during the first half-hour 
after the opening rotation.
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    \21\ Proposed OPRA Plan Section III (m).
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2. Alternative B
    As an alternative to allocating capacity based on the average 
quoting frequency of those options classes in which an exchange has 
sufficient volume to meet certain minimum thresholds, the Commission is 
proposing to allocate capacity using a modified equal share method. 
Specifically, under the proposed equal share method, capacity would be 
allocated equally among all the options exchanges with adjustments 
based on the market's ratio of quotes to contract volume. The more 
efficient the market (i.e., the fewer quotes to contracts), the greater 
the allocation that market receives. Any options classes listed by an 
exchange during the preceding calendar quarter would be excluded from 
the ratio calculation. Excluding new listings from the ratio 
calculation would allow exchanges to list new options classes without 
being penalized in the allocation of capacity.
    The equal allocation would be adjusted by an exchange's deviation 
from the average ratio of quotes-to-contracts traded multiplied by a 
dampening factor. The Commission is proposing that the dampening factor 
be 10% for the first Quote-to-Contract Volume Deviation calculation. 
The dampening factor will be reduced by one percent and a recalculation 
of the Quote-to-Contract Volume Deviation will be made if after the 
first calculation any exchange's capacity allocation falls below a pre-
determined minimum, which the Commission is proposing to be 15% of all 
OPRA capacity. Recalculations of the Quote-to-Contract Volume Deviation 
will continue, reducing the dampening factor by one percent for each 
successive recalculation until all exchanges have at least the 15% 
minimum capacity allocation.
    The Commission seeks comment on Alternative B as proposed, and on 
whether another relative performance criteria, such as quotes-to-number 
of trades, would be more appropriate. The Commission also seeks comment 
on what minimum portion of capacity an exchange should be guaranteed. 
For example, rather than 15%, is 10% a more appropriate minimum? The 
Commission also seeks comment about the propriety of the proposed 
dampening factor. Should the dampening factor for the first calculation 
be a factor other than 10%? In addition, should the dampening factor 
used in the recalculations be reduced from the factor used in the first 
calculation by a percentage other than one percent?

III. Request for Public Comments

    The Commission seeks comments on adopting a capacity allocation 
formula, as described in this release. In addition to the requests for 
comments throughout the release, the Commission seeks comment on 
whether a capacity allocation formula to allocate OPRA systems capacity 
during peak periods is necessary and should be adopted. If an objective 
capacity allocation formula is desirable, commenters should address 
which of the Commission's proposals would most fairly allocate systems 
capacity among the options exchanges during peak periods. Commenters 
should also address whether there are any legal or policy reasons why 
the Commission should consider a different approach and a description 
of what that approach should be. The Commission seeks comment on the 
specific proposals set forth, as well as on the proposed calculation of 
the average quoting frequency for multiply-traded and exclusively-
traded products and the proposed treatment of new listings and new 
entrants into the market. Commenters should also address the propriety 
of a quarterly allocation calculation and whether OPRA participants 
should be permitted to perform the calculation, and under what 
circumstances. In addition, the Commission seeks comment on whether, 
under either of the proposed allocation alternatives, options exchanges 
should receive capacity in units that could be traded among the options 
exchanges, with the resulting transactions reported to the Commission.

IV. Costs and Benefits of the Proposed Plan Amendments

    The Commission is considering the costs and benefits of the 
proposed amendment to the OPRA Plan.

A. Benefits

    The Commission believes that some form of capacity allocation 
should provide significant short-term benefits by avoiding delayed 
quotes. Currently, OPRA has the capacity to handle approximately 3,540 
messages per second and the exchanges are approaching this level on an 
almost daily basis. On March 15, 2000, OPRA received 3,486 messages per 
second over a five-minute period and 3,544 messages per second over a 
one-minute period. The Commission believes that without a capacity 
allocation formula for peak message periods, peak message

[[Page 30152]]

traffic may regularly exceed OPRA's capacity, especially with the entry 
of the ISE, the planned conversion to decimal pricing, and the 
dissemination of options quotes with size. If peak quoting rates exceed 
OPRA's systems capacity, an unacceptable level of queuing may occur and 
stale or selective market data may be transmitted to market 
participants and investors, thereby reducing market transparency and 
hampering efficient price discovery. As a result, investors may be 
making investment decisions based on stale or delayed quote 
information.
    The Commission believes that, until sufficient capacity is 
available to the options markets, the adoption of an objective capacity 
allocation formula, such as one of those proposed by the Commission, 
should help to ensure that scarce OPRA systems capacity is allocated in 
an equitable manner. The Commission further believes that the adoption 
of objective criteria should bring additional transparency and 
consistency to the allocation process. By using an objective capacity 
allocation formula to determine each exchange's message traffic 
limitations during high volume or high volatility times, the 
Commission's proposal should enable the options markets to disseminate 
options market data on a real-time basis, which should foster 
competition. Further, the proposal should maintain efficient and 
orderly markets for options by ensuring that current market data is 
continuously available and reliable. Finally, the proposal should 
encourage each individual exchange to establish and utilize efficient 
quote reduction methods based on the amount of message capacity it has 
been allocated, thereby promoting efficiency.

B. Costs

    Although the proposed capacity allocation formulas have been 
tailored to minimize the costs on any one exchange, the Commission 
expects that the options exchanges will experience some burdens because 
capacity will be limited during peak periods and the exchanges will 
have to reduce message traffic during peak times. This may result in 
the exchanges taking steps to delist or inactivate options that are not 
being actively traded or reduce the number of times that quotes can be 
refreshed for certain options classes. The Commission notes, however, 
that the options exchanges have previously agreed to allocate existing 
OPRA capacity during peak periods on three occasions, while continuing 
to work on other short-term and long-term mitigation strategies.
    To assist the Commission in its evaluation of the costs and 
benefits that may result from the proposed alternatives, commenters are 
requested to provide analysis and data relating to the anticipated 
costs and benefits associated with the proposed allocation 
alternatives, as well as any possible anti-competitive impact of the 
proposed alternatives. Specifically, the Commission requests commenters 
to address whether any of the proposed alternatives would generate the 
anticipated benefits or impose any costs on U.S. investors or others.

V. Effects on Competition, Efficiency, and Capital Formation

    Commenters should consider the proposed rule's effect on 
competition, efficiency and capital formation.
    Section 23(a) of the Act \22\ requires that the Commission, when 
promulgating rules under the Act, to consider the anti-competitive 
effects of such rules, if any, and to balance any impact against the 
regulatory benefits gained in furtherance of the purposes of the Act. 
Section 3(f) of the Act \23\ requires the Commission, when engaging in 
rulemaking, to consider or determine whether the action is necessary or 
appropriate in the public interest, and whether the action would 
promote efficiency, competition, and capital formation.
    The Commission solicits comments on the impact of the proposed 
rules on competition. Specifically, the Commission requests commenters 
to address how the proposed rule would affect competition between and 
among the options exchanges, market participants and investors. 
Further, the Commission requests comment on the proposal's effect on 
efficiency and capital formation.
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    \22\ 15 U.S.C. 78w(a).
    \23\ 15 U.S.C. 78c(f).
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    For purposes of the Small Business Regulatory Enforcement Fairness 
Act of 1996,\24\ the Commission is also requesting information 
regarding the potential impact of the proposed rule on the economy on 
an annual basis. If possible, commenters should provide empirical data 
to support their views.
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    \24\ Pub. L. No. 104-121, tit. II, 110 stat. 857.
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VI. Initial Regulatory Flexibility Analysis

    This Initial Regulatory Flexibility Analysis (``IRFA'') has been 
prepared in accordance with Section 3 of the Regulatory Flexibility Act 
(``RFA'').\25\ It relates to proposed amendments to the OPRA Plan to 
establish a capacity allocation model to allocate OPRA systems capacity 
among the options exchanges during peak periods.
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    \25\ 5 U.S.C. 603(a).
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A. Reasons for and Objectives of the Proposal

    Although the participant exchanges have agreed to previous short-
term capacity allocations and continue to work on short-term mitigation 
strategies, they have been unable to formulate a fair and objective 
capacity allocation model, which would include disincentives to quote 
existing listings or to add new listings excessively without a sound 
business rationale. The Commission is proposing to amend the OPRA Plan 
on its own initiative, until a long-term solution to the options 
industry's capacity problems has been implemented.
    The objective of the proposed capacity allocation model is to 
achieve the statutory goals regarding the maintenance of fair and 
orderly markets to assure efficient execution of securities 
transactions and the availability to brokers, dealers, and investors of 
information with respect to quotations for, and transactions in, 
securities. The adoption of an objective capacity allocation model to 
allocate fairly OPRA systems capacity among the options exchanges 
during peak periods until a long-term solution to the capacity problem 
is achieved is intended to prevent queuing and delays in the 
dissemination of options market information that would result in market 
participants receiving unreliable market data.

B. Legal Basis

    Section 11A(a)(3)(B) of the Act \26\ authorizes the Commission, by 
rule or order, to authorize or require self-regulatory organizations 
(``SROs'') 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. Rule 11Aa3-2 \27\ establishes procedures for 
the proposal of amendments to national market system plans, such as the 
OPRA Plan. Paragraph (b)(2) of Rule 11Aa3-2 \28\ states that the 
Commission may propose amendments to an effective national market 
system plan by publishing the text of the amendment together with a 
statement of purpose of the amendments.
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    \26\ 15 U.S.C. 78k-1(a)(3)(B).
    \27\ 17 CFR 240.11Aa3-2.
    \28\ 17 CFR 240.11Aa3-2(b)(2).

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[[Page 30153]]

C. Small Entities Affected by the Proposed Amendments

    The proposal would directly affect Amex, CBOE, ISE, PCX, and Phlx, 
none of which are small entities. Paragraph (e) of the Rule 0-10 \29\ 
states that the term ``small business,'' when referring to an exchange, 
means any exchange that has been exempted from the reporting 
requirements of Rule 11Aa3-1.\30\ Thus, there would be no impact for 
purposes of the RFA on small businesses.
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    \29\ 17 CFR 240.0-10(e).
    \30\ 17 CFR 240.11Aa3-1.
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D. Reporting, Recordkeeping, and Other Compliance Requirements

    The proposals would not impose any new reporting, recordkeeping, or 
other compliance requirements.

E. Duplicative, Overlapping or Conflicting Federal Rules

    The Commission believes that there are no rules that duplicate, 
overlap or conflict with the proposed rules.

F. Significant Alternatives

    The RFA directs the Commission to consider significant alternatives 
that would accomplish the stated objectives, while minimizing any 
significant economic impact on small entities. In connection with the 
proposal, the Commission considered the following alternatives: (1) the 
establishment of differing compliance or reporting requirements or 
timetables that take into account the resources available to small 
entities; (2) the clarification, consolidation, or simplification of 
compliance and reporting requirements under the Rule for small 
entities; (3) the use of performance rather than design standards; and 
(4) an exemption from coverage of the Rule, or any part thereof, for 
small entities. The Commission believes that none of the above 
alternatives is applicable. The OPRA Plan participants are the only 
parties that are subject to the requirements of the OPRA Plan. The OPRA 
Plan participants are all national SROs and, as such, are not ``small 
entities.'' Therefore, the Commission does not believe the alternatives 
are applicable to the proposal.

G. Solicitation of Comments

    The Commission encourages the submission of comments with respect 
to any aspect of this IRFA. In particular, the Commission seeks comment 
on: (i) the number of small entities, if any, that would be affected by 
the proposed amendment; and (ii) the impact that the proposed amendment 
would have, if any, on such entities. Such comments will be considered 
in the preparation of the Final Regulatory Flexibility Analysis, if the 
proposed amendment is adopted, and will be in the same public file as 
comments on the proposed amendments themselves. Comments should be 
submitted in triplicate to Jonathan G. Katz, Secretary, Securities and 
Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549-0609. 
Comments also may be submitted electronically at the following e-mail 
address: [email protected]. All comment letters should refer to 
File No. 4-434; this file number should be included on the subject line 
if e-mail is used. Comment letters will be available for public 
inspection and copying in the Commission's Public Reference Room. 
Electronically submitted comment letters also will be posted on the 
Commission's Internet web site (http://www.sec.gov).

VII. Paperwork Reduction Act

    The Paperwork Reduction Act does not apply because the proposed 
amendments do not impose recordkeeping or information collection 
requirements, or other collections of information which require 
approval of the Office of Management and Budget under 44 U.S.C. 3501, 
et. seq.

VIII. Description of Alternative Proposed Amendments to the OPRA 
Plan

    The Commission hereby proposes to amend the OPRA Plan to provide 
for a specific formula to allocate capacity among the options exchanges 
during peak usage periods pursuant to Rule 11Aa3-2(b)(2) and (c)(1) 
\31\ and the Commission's authority under Section 11A(a)(3)(B) of the 
Act.\32\
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    \31\ 17 CFR 240.11Aa3-2(b)(2) and (c)(1).
    \32\ 15 U.S.C. 78k-1(a)(3)(B). Section 11A(a)(3)(B) authorizes 
the Commission, in furtherance of its statutory directive to 
facilitate the development of a national market system, by rule or 
order, to authorize or require SROs 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 
subsystem thereof) or one or more facilities thereof.
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Alternative A

* * * * *

III. Definitions

    (a)-(k) No change.
    (1) Relevant Calendar Quarter.
    (i) For the capacity allocation commencing on May 1 of each year, 
the Relevant Calendar Quarter shall mean the months of January, 
February, and March.
    (ii) For the capacity allocation commencing on August 1 of each 
year, the Relevant Calendar Quarter shall mean the months of April, 
May, and June.
    (iii) For the capacity allocation commencing on November 1 of each 
year, the Relevant Calendar Quarter shall mean the months of July, 
August and September.
    (iv) For the capacity allocation commencing on February 1 of each 
year, the Relevant Calendar Quarter shall mean the months of October, 
November and December.
    (m) ``Included Class'' means any options class listed by an OPRA 
participant:
    (i) For which such participant executes during the Relevant 
Calendar Quarter an average of at least 15 trades per day if the 
options class is multiply-listed;
    (ii) For which such participant executes during the Relevant 
Calendar Quarter an average of at least 30 trades per day if the 
options class is exclusively listed; or
    (iii) That during the Relevant Calendar Quarter has been trading 
options for fewer than 270 calendar days.
    (n) An OPRA participant that is operating an options market 
receives a ``Capacity Credit'' for each options class that is an 
Included Class for that participant equal to:
    (i) For a multiply-traded options class, the average quote messages 
generated during the Relevant Calendar Quarter by all OPRA 
participants, for which such class is an Included Class, during the 
first half-hour of trading after the opening rotation is completed 
divided by the number of such OPRA participants; or 
    (ii) For an exclusively-listed options class, the average quote 
messages generated during the Relevant Calendar Quarter by the OPRA 
participant during the first half-hour of trading after the opening 
rotation is completed.
    (o) ``Allocation Percentage'' for an OPRA participant means the 
total of all such participant's Capacity Credits divided by the total 
of all Capacity Credits for all OPRA participants.

IV. No Change

V. (a)-(c) No Change

    (d) Quarterly Calculation of Capacity Allocation.
    (i) On the first of February, May, August and November of each 
year, each OPRA participant that operates an options exchange will 
receive an allocation of OPRA's peak period systems capacity in an 
amount equal to its Allocation Percentage multiplied by the total OPRA 
systems capacity.

[[Page 30154]]

    (ii) OPRA will calculate the capacity allocation specified in 
paragraph (d)(i) as soon as possible after the end of the Relevant 
Calendar Quarter. OPRA will use data to make this calculation that is 
provided to it by the OPRA participants. Alternatively, OPRA can 
contract with its processor or with another third party to perform this 
calculation. OPRA will notify the OPRA participants and the Commission 
of the capacity allocation for peak periods promptly after such 
calculation is made.
    (e) [d] Indemnification.
    (i)-(ii) No change.
* * * * *

Alternative B

* * * * *

III. Definitions

    (a)-(k) No change.
    (l) Relevant Calendar Quarter.
    (i) For the capacity allocation commencing on May 1 of each year, 
the Relevant Calendar Quarter shall mean the months of January, 
February, and March.
    (ii) For the capacity allocation commencing on August 1 of each 
year, the Relevant Calendar Quarter shall mean the months of April, 
May, and June.
    (iii) For the capacity allocation commencing on November 1 of each 
year, the Relevant Calendar Quarter shall mean the months of July, 
August and September.
    (iv) For the capacity allocation commencing on February 1 of each 
year, the Relevant Calendar Quarter shall mean the months of October, 
November and December.
    (m) ``Quotes-to-Contract Volume'' for an OPRA participant means the 
average daily quotes in options classes listed for more than 3 calendar 
months generated during the Relevant Calendar Quarter by a participant 
divided by the average daily contract volume traded in options classes 
listed for more than 3 calendar months by that participant during the 
same calendar quarter.
    (n) ``Average Quotes-to-Contract Volume'' means the average Quote-
to-Contract Volume of all OPRA participants during the Relevant 
Calendar Quarter computed by adding together the Quotes-to-Contract 
Volume for each participant and dividing by the number of participants.
    (o) ``Quotes-to-Contract Volume Deviation'' for an OPRA participant 
is calculated using the following formula:
    (1--(Quotes-to-Contract Volume for that OPRA participant/ Average 
Quotes-to-Contract Volume)) * Dampening Factor.
    (d) ``Equal Share'' means one divided by the number of OPRA 
participants that are operating an options market.
    (d) No Change
    (d) (a)-(c) No change.
    (d) Quarterly Calculation of Capacity Allocation
    (i) On the first of February, May, August, and November of each 
year, each OPRA participant that operates an options exchange will 
receive an allocation of OPRA's systems capacity in an amount equal to 
the sum of the Equal Share and such participant's Quotes-to-Contract 
Volume Deviation. For purposes of calculating the Quote-to-Contract 
Volume Deviation, the Dampening Factor shall equal 10%.
    (ii) Notwithstanding paragraph (d)(i), in no event shall an OPRA 
participant that operates an options exchange receive a capacity 
allocation that is less than 15% of OPRA's systems capacity. If the 
initial calculation of the Quote-to-Contract Volume Deviation results 
in an options exchange receiving an allocation of less than 15% of the 
total OPRA system's capacity, the Quote-to-Contract Volume Deviation 
will be recalculated as follows:
    a. The first recalculation shall consist of a downward adjustment 
of the Dampening Factor by 1% (i.e., to 9%) applied to all OPRA 
participants.
    b. If after the first recalculation, any OPRA participant that 
operates an options exchange still receives less than 15% of OPRA's 
systems capacity, the recalculations shall continue by adjusting the 
Dampening Factor downward by 1% until all OPRA participants have at 
least 15% of OPRA's systems capacity.
    (iii) OPRA will calculate the capacity allocation specified in 
paragraph (d)(i) as soon as possible after the end of the Relevant 
Calendar Quarter. OPRA will use data to make this calculation that is 
provided to it by the OPRA participants. Alternatively, OPRA can 
contract with its processor or with another third party to perform this 
calculation. OPRA will notify the OPRA participants and the Commission 
of the capacity allocation for peak periods promptly after such 
calculation is made.
    (e) [d] Indemnification.
    (i)-(ii) No change.
* * * * *

    By the Commission.
    Dated: May 4, 2000.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-11680 Filed 5-9-00; 8:45 am]
BILLING CODE 8010-01-P