[Federal Register Volume 65, Number 232 (Friday, December 1, 2000)]
[Notices]
[Pages 75564-75576]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-30661]



[[Page 75563]]

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Part VIII





Securities and Exchange Commission





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Options Price Reporting Authority; Notice

  Federal Register / Vol. 65, No. 232 / Friday, December 1, 2000 / 
Notices  

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43621; File No. 4-434]
RIN 3235-AH92


Options Price Reporting Authority

AGENCY: Securities and Exchange Commission.

ACTION: Adoption of amendments to national market system plan.

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SUMMARY: The Securities and Exchange Commission (``SEC'' or 
``Commission'') is adopting amendments to the Options Price Reporting 
Authority Plan for Reporting of Consolidated Options Last Sale Reports 
and Quotation Information. The amendments establish a formula, as a 
short-term solution to OPRA capacity shortages, to allocate the message 
capacity of the OPRA system among the participant exchanges during peak 
usage periods.

EFFECTIVE DATE: January 2, 2001.

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

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Executive Summary
II. Background
III. Description of Proposal
IV. Description of Amendments Being Adopted
V. Discussion
    A. Introduction
    B. Comments on Commission's Proposal to Allocate Capacity
    1. Comments on Proposed Methods of Incorporating a Measure of 
Quoting Efficiency into the Allocation of Capacity
    2. Comments on Capacity Allocation Only for Classes in Which an 
Exchange Has a Minimum Level of Trading Volume
    3. Comments on Allocating Capacity Equally Among the Options 
Exchanges
    4. Comments on Rewarding Quality of Quotes
    5. Comments on Anticompetitive Aspects of Allocation Formula
    6. Comments About New Exchanges
VI. Costs and Benefits of the OPRA Plan Amendment
    A. Response to Comments
    B. Benefits
    C. Costs
    D. Conclusion
VII. Effects on Competition, Efficiency, and Capital Formation
VIII. Summary of Final Regulatory Flexibility Analysis
IX. Conclusion
X. Description of Amendments to the OPRA Plan

I. Executive Summary

    In Section 11A of the Securities Exchange Act of 1934 (``Act''), 
Congress directed the Commission to assure, among other things, the 
availability to broker-dealers and investors of quotation and 
transaction information in securities.\1\ It is this directive that 
makes transparency and, in particular, the real-time, public 
dissemination of trade and quotation information a central feature of 
the U.S. securities markets. Accordingly, participants in the options 
markets today have access to a consolidated stream of quotation and 
transaction information for any of the thousands of options classes 
that trade. This transparency, in turn, contributes to efficient price 
discovery, offsets the fragmentation of buying and selling interest on 
multiple exchanges, and facilitates the best execution of customers' 
orders by broker-dealers.
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    \1\ 15 U.S.C. 78k-1.
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    Market information, however, is only of use to market participants 
if it is disseminated in a timely fashion. Unfortunately, the amount of 
market data generated by the options markets is dangerously close to 
exceeding the capacity of the Options Price Reporting Authority 
(``OPRA'') system to do this.\2\ In fact, prior to recent increases in 
OPRA capacity, there have been periods when the amount of options 
market data sent by the exchanges to OPRA exceeded OPRA capacity to 
publicly disseminate it on a real-time basis. 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 over participants--
including investor--not physically on the particular exchange floor. 
This result reduces market transparency, impedes efficient price 
discovery, and is inconsistent with the goal of fair competition among 
brokers and dealers and exchange markets.
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    \2\ The OPRA Plan for Reporting of Consolidated Options Last 
Sale Reports and Quotation Information (``OPRA Plan'') 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 signatories to the OPRA Plan that currently operate an 
options market are the American Stock Exchange (``Amex''); the 
Chicago Board Options Exchange (``CBOE''); the International 
Securities Exchange (``ISE''); the Pacific Exchange (``PCX''); and 
the Philadelphia Stock Exchange (``Phlx''). The New York Stock 
Exchange is a signatory to the OPRA Plan, but sold its options 
business to the CBOE in 1997. See Securities Exchange Act Release 
No. 38542 (April 23, 1997), 62 FR 23521 (April 30, 1997).
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    During the past year, the options exchanges have agreed, on an ad 
hoc basis, to allocate OPRA capacity among themselves when demand for 
the scarce capacity exceeds the supply available. Currently, however, 
the options exchanges do not have an agreement on how to limit the 
amount of market data each will send to OPRA. Because OPRA has recently 
expanded its capacity to 8,000 messages per second, there have been no 
strains on OPRA capacity.\3\ Nevertheless, the full implementation of 
decimal pricing, the dissemination of quotations with size, and the 
complete roll-out of ISE's new listings, is expected to once again 
strain OPRA capacity limits.
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    \3\ Currently, OPRA systems capacity is 8,000 messages per 
second, while the exchanges' peak demand to date has approached 
3,700 messages per second.
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    For this reason, the Commission is adopting amendments to the OPRA 
Plan to allocate, among the options exchanges, OPRA's peak period 
message handling capacity.\4\ The Commission believes that these 
amendments are necessary because of the OPRA participants' inability to 
agree on how to allocate capacity among themselves and the inability to 
increase ORPA's systems capacity within the short-term to a level 
sufficient to permit the exchanges to generate message traffic without 
restraint. The allocation of OPRA capacity among the exchanges 
effectively puts a cap on the number of messages that each exchange can 
send to OPRA when the exchanges' aggregate demand for OPRA capacity 
exceeds its supply. Only by limiting each exchange to a maximum number 
of messages per second that it can send to OPRA, during periods when 
the demand on OPRA systems capacity exceeds the supply, will all 
broker-dealers and investors have available to them accurate and timely 
information with respect to quotations for and transactions in options. 
Further, the Commission believes that the formula it is adopting today 
allocates capacity in a more objective and transparent manner, is 
consistent with the statutory objectives of fair competition among 
markets,\5\ and assures the availability to brokers, dealers, and 
investors of information

[[Page 75565]]

with respect to quotations for and transactions in options.\6\
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    \4\ In May 2000, the Commission proposed amendments to the OPRA 
Plan to allocate OPRA systems capacity among the options exchanges 
during peak usage periods. See Securities Exchange Act Release No. 
42755 (May 4, 2000), 65 FR 30148 (May 10, 2000) (``Proposing 
Release'').
    \5\ See Section 11A(a)(1)(C)(ii) of the Act, 15 U.S.C. 78k-
1(a)(1)(C)(ii).
    \6\ See Section 11A(a)(1)(C)(iii) of the Act, 15 U.S.C. 78k-
1(a)(1)(C)(iii).
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    Although a capacity allocation formula inhibits exchanges' ability 
to generate and send to OPRA unlimited quotations, this is a direct 
consequence of insufficient OPRA capacity to handle peak message 
volumes. In this context, the Commission must balance this concern 
against investors' and other market participants' interest in having 
timely and reliable market information to use to make informed 
investment and trading decisions. The Commission is adopting these 
amendments as a short-term solution and only after the OPRA 
participants themselves have been unable to reach agreement on an 
objective capacity allocation formula. As a more permanent solution, 
the Amex, CBOE, PCX, and Phlx have consented, as part of their 
settlement of an enforcement action with the Commission, to, among 
other things, modify the organizational structure and operation of OPRA 
so that each exchange will independently determine the amount of 
capacity that it will obtain.\7\
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    \7\ See In the Matter of Certain Activities of Options 
Exchanges, Securities Exchange Act Release No. 43268, September 11, 
2000; Administrative Proceeding File No. 3-10282 (``SEC Order'').
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II. 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.\8\ The OPRA Plan governs the process by which options market data 
are collected from participant exchanges, consolidated, and 
disseminated.\9\ Consolidated data, when it is disseminated in a timely 
manner, enable broker-dealers and investors to know the best price that 
is currently available for a particular product. It assists customers 
in setting the terms of their orders and in monitoring how well their 
brokers execute their orders. Consolidated data also assist investors' 
brokers to obtain, as well as exchange market makers and specialists to 
provide, the best execution possible for an order.
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    \8\ 15 U.S.C. 78k-1(a)(2) and 15 U.S.C. 78k-1(a)(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).
    \9\ In 1976, the Commission approved OPRA's registration as a 
securities information processor. See Securities Exchange Act 
Release No. 12035 (January 22, 1976), 41 FR 4372.
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    The OPRA 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. The OPRA 
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 such data 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.
    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 3,900 equity 
securities and indexes underlying listed options products, and more 
than 178,000 individual options series.\10\ 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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    \10\ 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.\11\ 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 may be automatically updated on each exchange that trades 
those options. This enormous amount of quote message traffic burdens 
the OPRA system, and threatens to compromise the reliability of options 
market data disseminated to market participants, including retail 
investors.
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    \11\ For example, in February 2000, the average number of quotes 
per day was 37.5 million, while 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.\12\ As options 
message traffic has increased over the last few years, OPRA has 
directed SIAC to implement systems enhancements 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.\13\
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    \12\ As discussed below, this tremendous increase in message 
traffic may be attributed, in part, to the 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 ISE continues its roll-out of the top 600 most actively-
traded options classes, products begin to trade in decimals rather 
than fractions, and quotes are disseminated with size.
    \13\ OPRA systems capacity was expanded to 5,000 messages per 
second, and subsequently, 8,000 messages per second, on July 17, 
2000 and October 2, 2000, respectively. Planned enhancements to the 
OPRA system are expected to increase total systems capacity to 
12,000 messages per second by year-end.
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    The options exchanges have, individually, implemented a number of 
internal quote message mitigation strategies and the Commission expects 
the options exchanges to continue to consider and implement other quote 
message mitigation strategies as both long-term and short-term 
solutions. Nonetheless, quote message traffic continues to strain OPRA 
systems capacity. The options exchanges have responded to this capacity 
crisis by agreeing to allocate existing OPRA systems capacity among 
themselves during peak periods, while continuing to work on other 
short-term mitigation strategies, such as delisting classes with little 
or no open interest and developing a system that would only disseminate 
quotes upon request for inactive options classes. To date, the options 
markets have agreed, on six occasions, to allocate the then-existing 
OPRA systems capacity among themselves during peak periods through 
temporary amendments to the OPRA Plan.\14\ The capacity allocations 
implemented by the options exchanges over the past nine months have 
been based loosely on the historical peaks experienced by each

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options market, and determined through negotiations among the markets. 
The options exchanges have, however, been unable to agree to anything 
other than short-term, ad hoc allocations that failed to ensure the 
continued availability of quote and trade information to other market 
participants \15\ by providing incentives for the exchanges to reduce 
excessive quoting of existing listings and to add new listings only 
when there was a sound business rationale. The options exchanges, 
however, failed to agree to an allocation of capacity following the 
expiration of the most recent temporary amendment to the OPRA Plan.\16\ 
As noted above, pursuant to the SEC Order, the Amex, CBOE, PCX, and 
Phlx are required, to act jointly with the ISE, by September 11, 2001, 
to amend the OPRA Plan to modify the structure and operation of OPRA so 
that each exchange will independently determine the amount of capacity 
that it will obtain.\17\ Because the Commission is concerned that the 
options exchanges will be unable, in the near future, to agree on how 
to allocate capacity for the period prior to development and 
implementation of a means for each exchange to contract for its own 
planned capacity requirements, the Commission is adopting these 
amendments to the OPRA Plan as a methodology by which the limited OPRA 
systems capacity available will be allocated.
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    \14\ 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); 42493 (March 3, 
2000), 65 FR 12597 (March 9, 2000)(order approving File No. SR-OPRA-
00-03).); 42779 (May 12, 2000), 65 FR 31950 (May 19, 2000)(order 
approving File No. SR-OPRA-00-04); 42849 (May 26, 2000), 65 FR 36180 
(June 7, 2000)(order approving File No. SR-OPRA-00-05); and 43063 
(June 21, 2000), 65 FR 46752 (July 31, 2000)(order approving File 
No. SR-OPRA-00-07)
    \15\ See Section 11A(a)(1)(C)(iii) of the Act, 15 U.S.C. 78k-
1(a)(1)(C)(iii).
    \16\ Consequently, the options exchanges currently are not 
operating under a capacity allocation plan. See letter from Joseph 
Corrigan, Executive Director, OPRA, to Deborah Flynn, Senior Special 
Counsel, Division of Market Regulation, Commission, dated September 
25, 2000.
    \17\ See supra note .
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III. Description of Proposal

    In May 2000, the Commission proposed two alternative capacity 
allocation formulae, briefly described below, to be used in the short-
term to allocate OPRA systems capacity among the options exchanges 
during peak usage periods.\18\
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    \18\ See Proposing Release, supra note 4.
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    Proposed Alternative A was based on the concept that an exchange 
should receive a portion of the available systems capacity only for 
those options classes in which the exchange's trading reached a minimum 
threshold (``Included Classes''). The Commission proposed that an 
options class be considered an Included Class for an exchange, if 
during a three-month period, that exchange traded an average of: (1) 15 
trades per day, if the class is multiply-listed, or (2) 30 trades per 
day, if the class is exclusively-listed. The Commission requested 
comment on the proposed definition of Included Class. Capacity would 
then be allocated during peak periods to each exchange for which an 
options class is an Included Class based on the average quotation 
volume across all markets for which the particular class was an 
Included Class during the first half-hour of the trading day. To permit 
new entrants a fair opportunity to compete with existing exchanges, the 
Commission's Proposed Alternative A provided that all options classes 
listed on an exchange that had been operating for fewer than nine 
months be Included Classes.
    Proposed Alternative B was based on an equal allocation of OPRA 
systems capacity among the options exchanges, with adjustments based on 
the exchange's ratio of total quotes to its total contract volume. The 
fewer quotes per contract traded on an exchange, the greater the 
allocation that exchange would receive. To allow exchanges to list new 
options classes without being penalized in the determination of how 
capacity is allocated, any options classes listed by an exchange during 
the preceding calendar quarter would be excluded from the ratio 
calculation. The equal allocation would be adjusted by an exchange's 
deviation from the average ratio of total quotes to its total contract 
volume, multiplied by a dampening factor. The Commission proposed that 
the dampening factor be 10% for the first adjustment calculation. If, 
after the first calculation, any exchange's capacity allocation fell 
below a pre-determined minimum, which the Commission proposed to be 15% 
of all OPRA capacity, the dampening factor would be reduced by one 
percent and an adjustment recalculation performed. Recalculations would 
continue, reducing the dampening factor by 1% for each successive 
recalculation, until all exchanges have at least the pre-determined 
minimum capacity allocation.

IV. Description of Amendment Being Adopted

    The capacity allocation formula adopted today, which will be 
calculated quarterly and applied only when the exchanges' demand for 
OPRA capacity exceeds its supply, combines a number of elements found 
in the two alternative formulae proposed by the Commission, and 
incorporates several modifications recommended by commenters. The 
Commission recognizes that there is no one ideal capacity allocation 
methodology and, therefore, as suggested by one commenter, has 
determined to divide OPRA systems capacity into separate portions and 
allocate those portions based on different criteria.
    The formula adopted by the Commission allocates an equal portion of 
one-third of available OPRA systems capacity to each options 
exchange.\19\ This means that if there are five options exchanges, each 
exchange would have available at least 533 messages per second with the 
current 8,000 message per second capacity of OPRA. When OPRA capacity 
is expanded to 12,000 messages per second, as it is expected to be by 
year-end, each exchange would have available at least 800 messages per 
second. While this amount of capacity may not be sufficient to fully 
satisfy any of the exchanges' capacity needs, the Commission believes 
it is a fair amount of capacity to be allocated solely on the basis of 
being a registered exchange operating an options market. The Commission 
believes that it is important to assure each options exchange at least 
a minimum amount of capacity to disseminate its market data, in order 
for the formula being adopted today to be consistent with the statutory 
objectives of fair competition and the availability to brokers, 
dealers, and investors of information with respect to quotations for 
and transactions in securities.\20\
    The capacity remaining after the allocation described above and any 
allocation to new exchanges as described below, will be allocated among 
the exchanges based upon a variation of Proposed Alternative A, as set 
forth in the Proposing Release.\21\ Specifically, this remaining OPRA 
systems capacity will be allocated to the exchanges based on the 
average quotation message traffic generated during the last full hour 
of the trading day, 3 p.m. to 4 p.m. eastern time. An exchange will 
receive an allocation only for those options classes for which at least 
a minimum number of customer contracts \22\ are traded on that 
exchange.

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The formula does not allocate capacity to an exchange for a particular 
options class in which the exchange's average daily contract volume 
\23\ does not exceed 15 customer contracts for multiply-listed options 
classes and 25 customer contracts for exclusively-listed options 
classes.\24\ Exchanges will not be given additional capacity for new 
listings that do not trade the minimum number of customer contracts set 
forth above.
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    \19\ As described below, however, an options exchange that 
begins trading for the first time will receive an allocation of 
capacity equal to 40% of OPRA systems capacity divided by the total 
number of options exchanges. For each quarter thereafter, an 
exchange operating for fewer than 270 calendar days elects to 
receive this fixed allocation, or to receive an allocation based on 
the same formula as applied to other exchanges. See OPRA Plan, 
Section V (d) and (e). The equal portion of one-third of available 
OPRA systems capacity will be calculated using the total number of 
options exchanges, even though allocated only to those exchanges 
that do not receive a fixed new exchange allocation. See OPRA Plan, 
Section V (d)(ii).
    \20\ See Section 11A(a)(1)(C)(ii) and (iii) of the Act, 15 
U.S.C. 78k-1(a)(1)(C)(ii) and (iii).
    \21\ See Proposing Release supra note .
    \22\ For purposes of the formula, the term ``customer contract'' 
is defined as an options contract executed on an options exchange 
and cleared in a customer account at a registered clearing agency. 
See OPRA Plan, Section III (m).
    \23\ The exchange's average daily contract volume in an options 
class will be calculated based on the number of trading days such 
class is listed on such exchange during the calendar quarter.
    \24\ The term ``options class'' is defined in OPRA Plan, Section 
III (n), and includes options on groups or indexes of securities.
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    Because new exchanges may not have had time to develop their 
business to attract a sufficient number of customer contracts to meet 
the minimum customer contract volume set forth above, instead of 
receiving an allocation of capacity based on the formula described 
above, new exchanges will receive during their first quarter of 
operation, and may elect to receive thereafter, an allocation of OPRA 
systems capacity slightly greater than an equal portion of one-third of 
available capacity. Specifically, an options exchange that has been 
operating for fewer than 270 calendar days may choose to receive a 
capacity allocation (1) equal to 40% of available OPRA systems capacity 
divided by the total number of options exchanges (``New Exchange 
Share''); or (2) based on the same formula used to determine the 
capacity allocated to all other exchanges. A new options exchange will 
make an election five business days following the end of a calendar 
quarter regarding which method under which it wishes to receive a 
capacity allocation. During a new exchange's first quarter of 
operation, or any portion thereof, it will receive an allocation equal 
to 40% of available capacity divided by the total number of options 
exchanges.\25\ New markets will be treated the same as existing 
exchanges after the end of their first year of operation.\26\
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    \25\ If an options exchange begins to trade other than on the 
first of February, May, August, or November, each other options 
exchange's capacity will be recalculated pursuant to Section V 
(d)(ii)(B) of the OPRA Plan, using data from the most recent 
calendar quarter, except that any options exchange that was 
qualified for, and elected to receive, the New Exchange Share in the 
most recent quarterly allocation, will receive a New Exchange Share. 
See OPRA Plan, Section V(e).
    \26\ Because a new exchange that has been operating for fewer 
than 270 days will make, on the fifth business day following the end 
of a calendar quarter, its election for the next allocation period, 
a New Exchange Share may be allocated to an exchange for its first 
year of operation.
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V. Discussion

A. Introduction

    In Section 11A of the Act,\27\ Congress directed the Commission to 
facilitate the development of a national market system consistent with 
the objectives of the Act.\28\ In particular, Section 11A(a)(3)(B) of 
the Act authorizes the Commission ``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 this title in planning, 
developing, operating, or regulating a national market system (or a 
subsystem thereof) or one or more facilities.'' \29\ The procedures 
regarding filing amendments to a national market system plan are set 
forth under Rule 11Aa3-2.\30\ Rule 11Aa3-2 permits the Commission, on 
its own initiative, to propose amendments to an effective national 
market system plan,\31\ such as the OPRA Plan, and establishes the 
procedures for doing so.\32\ The Commission may adopt such an amendment 
if it finds that the amendment ``is necessary or appropriate in the 
public interest, for the protection of investors and the maintenance of 
fair and orderly markets, to remove impediments to, and perfect the 
mechanisms of, a national market system, or otherwise in furtherance of 
the purposes of the Act.'' \33\
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    \27\ 15 U.S.C. 78k-1.
    \28\ In Section 11A(a)(1)(C)(iii) of the Act, Congress found 
``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.'' 15 U.S.C. 78k-1(a)(1)(C)(iii).
    \29\ 15 U.S.C. 78k-(a)(3)(B).
    \30\ 17 CFR 240.11Aa3-2.
    \31\ 17 CFR 240.11Aa3-2(b)(2). 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. 
17 CFR 240.11Aa3-2(c)(2).
    \32\ 17 CFR 240.11Aa3-2.
    \33\ 17 CFR 240.11Aa3-2(c)(2).
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    The Commission proposed amendments to the OPRA Plan on its on 
initiative in accordance with Rule 11Aa2-3. After carefully considering 
the issues raised by the comment letters, the Commission is adopting an 
amendment to the OPRA Plan that establishes a formula for allocating 
OPRA systems capacity among the OPRA participants during peak usage 
periods.\34\ The Commission notes that the capacity allocation formula 
described in this release should be necessary only for the short-term. 
The Amex, CBOE, PCX, and Phlx have committed, as part of their 
settlement with the Commission, to act jointly with the ISE, to modify 
by September 11, 2001, the structure and operation of OPRA so that each 
exchange will independently determine the amount of capacity that it 
will obtain. Until implementation of this new structure, however, the 
Commission believes that the certainty and objectivity of the capacity 
allocation formula being adopted today is needed to ensure that 
investors have available timely and accurate options market data. The 
possibility that options exchanges will exceed the capacity limits 
currently available jeopardizes the timeliness and accuracy of options 
market data and, consequently, the protection of investors and the 
maintenance of fair and orderly markets.
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    \34\ Pursuant to paragraph (c)(2) of Rule 11Aa3-2 under the Act, 
the Commission designates up to 180 days from the date of 
publication of notice of the filing of an amendment to a national 
market system plan for its approval of the amendment to the OPRA 
Plan adopting a capacity allocation formula. The Commission finds 
that, due to the complexity of issues relating to adopting a formula 
to allocate OPRA systems capacity between the options exchanges 
during peak usage periods, it is necessary and appropriate in the 
public interest, for the protection of investors, and the 
maintenance of fair and orderly markets to designate this longer 
period. 17 CFR 240.11Aa3-2.
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B. Comments on Commission's Proposal to Allocate Capacity

    In response to the Proposing Release, the Commission received eight 
comment letters, representing the views of the five options exchanges 
and three other interested parties.\35\ Although none of the commenters 
recommended the adoption of the Commission's proposed alternatives, 
four commenters generally supported the concept of an allocation 
formula.\36\ Moreover, two commenters generally supported the concept 
of allocating OPRA systems capacity based on the number of listings on 
an exchange that satisfy a minimum level of trading volume, as set 
forth in

[[Page 75568]]

Proposed Alternative A.\37\ Two commenters, on the other hand, 
supported the concept of an equal allocation of available capacity.\38\ 
As discussed below, commenters generally did not support Proposed 
Alternative B, because of their opposition to the proposed measure of 
quoting efficiency. Two commenters stated that, in the long term, OPRA 
capacity should not be allocated based on a formula.\39\ Instead, these 
commenters believed that each options exchange should pay for the 
amount of capacity that it requires.\40\
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    \35\ See letters to Jonathan G. Katz, Secretary, Commission, 
from Joseph B. Stefanelli, Executive Vice President, Derivative 
Securities, AMEX, Commission, dated July 28, 2000 (``Amex Letter''); 
Edward J. Joyce, President and Chief Operating Officer, CBOE, dated 
June 9, 2000 (``CBOE Letter''); Michael J. Simon, Senior Vice 
President and General Counsel, ISE, dated June 9, 2000 (``ISE 
Letter''); James J. Bowe, Senior Executive Vice President Options, 
PCX, dated August 3, 2000 (``PCX Letter''); Meyer S. Frucher, 
Chairman and Chief Executive Officer, Phlx, dated June 12, 2000 
(``Phlx Letter''); Joel L. Bohm, General Counsel and Corporate 
Secretary, SIAC, dated June 8, 2000 (``SIAC Letter''); Joel 
Greenberg, Susquehanna Partners, GP, dated June 9, 2000 
(``Susquehanna Letter''); and Chris Delzio, dated June 7, 2000. A 
full summary of comments received on the proposed amendments to the 
OPRA Plan is available in the Commission's Public Reference Room 
(File No. 4-434).
    \36\ See Amex Letter; ISE Letter; Phlx Letter; and SIAC Letter.
    \37\ See CBOE Letter and ISE Letter.
    \38\ See Phlx Letter and Amex Letter.
    \39\ See Phlx Letter and CBOE Letter.
    \40\ Id. Another commenter proposed to address the Commission's 
concerns about OPRA system capacity by allowing the dissemination of 
all transaction prices, but quotations only for options classes 
meeting minimum volume thresholds or that have one of the three 
strike prices nearest to the price of the underlying security. The 
PCX argued that OPRA capacity should be targeted to options series 
that are actively traded and that all exchanges should be able to 
competitively quote those series to provide investors with the most 
competitive prices available. See PCX Letter. The Commission 
believes that this approach would be viable if the exchanges 
developed a system that would disseminate a quote only upon request. 
In the absence, however, of such a system, the Commission does not 
believe that this approach is consistent with Section 11A(c)(1)(B) 
of the Act. The Commission continues to encourage the exchanges to 
develop mitigation strategies, including the development of a 
request-for-quote system.
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1. Comments on Proposed Methods of Incorporating a Measure of Quoting 
Efficiency into the Allocation of Capacity
    Both allocation formulae proposed by the Commission incorporated a 
measure of quoting efficiency. Proposed Alternative A would have 
allocated capacity during peak periods to an exchange for which an 
options class was considered an Included Class, based on the average 
quotation volume during the first half-hour of the trading day across 
all markets for which such class was an Included Class. Proposed 
Alternative B would have adjusted an equal allocation of capacity based 
on an exchange's ratio of quotes to its trading volume.
    Several commenters opposed the Commission's proposed measures of 
quoting efficiency set forth in Proposed Alternative A and Proposed 
Alternative B. With respect to Proposed Alternative A, six of the 
commenters were opposed to determining the average quoting frequency of 
multiply-traded and exclusively-traded options classes based on the 
quoting activity that occurs during the first half-hour after the 
opening rotation, citing the difficulty in obtaining such information 
for the proposed time period.\41\ Four commenters suggested the full 
trading day, rather than the first half-hour, be used for calculating 
average quoting frequency, due to the effort that would be required to 
process the required raw data, the lack of clarity as to when a 
particular market has completed its opening rotation, and the potential 
for manipulation.\42\
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    \41\ See Amex Letter; CBOE Letter; ISE Letter; Susquehanna 
Letter; PCX Letter; and Phlx Letter.
    \42\ See Amex Letter; CBOE Letter; PCX Letter; and ISE Letter.
---------------------------------------------------------------------------

    With respect to Proposed Alternative B, one commenter expressed 
significant opposition to the initial equal allocation, arguing that 
the proposed adjustments to this allocation based on quoting efficiency 
were not significant enough to adequately reward more efficient 
exchanges.\43\ Another commenter also raised concerns about Proposed 
Alternative B, but for a different reason. Specifically, this commenter 
stated that the quote-to-contract volume aspect of Proposed Alternative 
B would reward established markets at the expense of new exchanges 
attempting to compete for market share by competitively quoting.\44\
---------------------------------------------------------------------------

    \43\ See CBOE Letter.
    \44\ See ISE Letter. This commenter noted that any allocation 
formula should promote competition and not in any way ``lock in'' or 
preserve the market share of any options exchange. Instead of basing 
an allocation formula on an exchange's volume or market share, which 
would prevent smaller or newer markets from effectively competing 
against exchanges with greater volume, this commenter advocated an 
allocation formula based solely on the products that an exchange 
trades. In addition, this commenter emphasized the need to adopt an 
allocation formula that would not perpetuate the problem of the 
inefficient use of OPRA bandwidth.
---------------------------------------------------------------------------

    One commenter objected to the way adjustments for quoting 
efficiency were proposed to be made to the initial equal allocation 
because it was based on an inappropriate measure of quoting 
efficiency.\45\ This commenter also expressed concerns that using the 
quote-to-volume ratio as a measure of quoting efficiency would 
discourage new listings, have the effect of giving different 
allocations to exchanges that have the same quoting frequency, and 
would generally impede competition by providing high volume exchanges 
with an advantage over new exchanges and lower-volume exchanges.
---------------------------------------------------------------------------

    \45\ See Phlx Letter. This commenter did not, however, recommend 
a more appropriate measure of quoting efficiency.
---------------------------------------------------------------------------

    Another commenter expressed concerns that Proposed Alternative B 
would result in market makers quoting larger spreads to compensate for 
a disincentive to adjust quotes based on volatility in the underlying 
security. In addition, this commenter argued that Proposed Alternative 
B would favor exchanges and options classes that have a greater 
percentage of institutional order flow, which could disadvantage retail 
investors, and could result in a disincentive to multiply-list options 
classes. In this regard, this commenter contended that aggressive 
quoting, which could negatively affect an exchange's quote-to-contract 
ratio, is necessary for a new market to attempt to acquire market share 
in a multiply-listed options class.\46\
---------------------------------------------------------------------------

    \46\ See Susquehanna Letter.
---------------------------------------------------------------------------

    The allocation formula adopted by the Commission today incorporates 
the measure of quoting efficiency contained in the Commission's 
Proposed Alternative A. That is, the exchanges will receive a capacity 
allocation based on the average quoting frequency of all exchanges for 
which an options class is an Included Class. Exchanges that quote more 
frequently than the average will not receive capacity equal to their 
past usage. Exchanges that quote less frequently will receive more 
capacity for that options class than their past usage, thus allowing 
them to use the extra capacity to support a business in other options 
classes, such as those which may not have sufficient trading volume to 
be an Included Class.
    The Commission recognizes the merit in commenters' views that 
limiting the capacity allocated to a particular exchange based on 
relative quoting frequency as proposed in Alternative A may discourage 
market makers from aggressively quoting and may favor larger, more 
established exchanges that do not need to aggressively quote to 
advertise for order flow. The Commission also agrees that there may be 
circumstances in which exchanges quoting with the same frequency may 
receive different allocations of capacity under the formula because one 
exchange does not have enough trading volume for particular options 
classes to be Included Classes. Nonetheless, the Commission believes 
that the formula being adopted today strikes an appropriate balance 
between the capacity needs of higher volume exchanges and that of newer 
and smaller volume markets because it combines the allocation of 
capacity based on the number of Included Classes on an exchange with 
the allocation of an equal portion of one-third of available capacity, 
which should ensure that newer and smaller exchanges receive sufficient 
capacity to actively compete for order flow. The Commission also 
believes that it is important to provide an incentive to exchanges to 
avoid excessive quoting. The Commission believes that the allocation 
formula adopted today would

[[Page 75569]]

do this by giving credit to an exchange based on the average quoting 
frequency of all exchanges, not just its own.
    Moreover, in response to commenters' concerns regarding the 
Commission's proposal to calculate the average quoting frequency based 
on activity occurring during the first half-hour of the trading day, 
the Commission has modified the proposal to consider the last full hour 
of the trading day, 3 p.m. to 4 p.m. eastern time, when calculating 
average quoting frequency. The Commission believes that this 
modification should address perceived problems relating to the 
overlapping opening rotations of the various markets.
2. Comments on Capacity Allocation Only for Classes in Which an 
Exchange Has a Minimum Level of Trading Volume
    Under Proposed Alternative A, the Commission proposed to allocate 
capacity to an exchange, only for those options classes that had a 
minimum trading volume on that exchange, which the Commission proposed 
to be 15 trades per day for multiply-listed options classes and 30 
trades per day for exclusively-listed options classes.
    Despite commenters' concerns that the proposed requirement that 
exchanges receive capacity credit under this scheme only for those 
classes for which there was a minimum level of trading may create 
disincentives to adding new listings,\47\ the Commission has retained 
this requirement in the formula adopted today. The Commission has 
chosen to retain this requirement because of its concern that the 
absence of such a requirement may create incentives for exchanges to 
list certain options products without a sound business rationale and 
solely for the purpose of increasing their capacity allocation.
---------------------------------------------------------------------------

    \47\ See ISE Letter; Phlx Letter; and Susquehanna Letter. The 
Phlx argued that because proposed Alternative A would provide no 
capacity allocation to an exchange if activity in an option class on 
that exchange failed to meet the volume thresholds to be considered 
an Included Class, the proposal would likely reduce competition by 
creating a disincentive for exchanges to list options that are 
already traded on other exchanges. This commenter expressed concern 
that an exchange may decide not to list an option class due to 
concerns that it will not attract enough volume to get an adequate 
capacity allocation.
---------------------------------------------------------------------------

    Commenters, however, generally opposed using the number of trades 
as the measure of activity in a particular options class on an 
exchange. Specifically, five commenters recommended that contract 
volume, rather than the number of trades, be used to measure activity 
in an options class to more accurately capture customer interest in a 
particular options class.\48\ Two of these commenters believed that 
only customer contract volume should be counted for purposes of 
determining which options classes were Included Classes.\49\
---------------------------------------------------------------------------

    \48\ See Amex Letter; CBOE Letter; ISE Letter; Phlx Letter; and 
Susquehanna Letter.
    \49\ See Amex Letter and ISE Letter.
---------------------------------------------------------------------------

    The Commission agrees with the commenters' suggestion that the 
number of customer contracts, rather than the total number of trades, 
be used to determine which options classes are Included Classes on an 
exchange. The number of customer contracts traded is a meaningful 
measure of the importance of a particular exchange to investors. In 
addition, to avoid encouraging market makers to trade among themselves 
solely for the purpose of achieving sufficient volume in an options 
class, the Commission is adopting commenters' recommendation that only 
transactions involving customer accounts be counted for purposes of 
determining whether an options class is an Included Class.
    Several commenters addressed the Commission's proposed trading 
thresholds for determining whether an options class should be 
considered an Included Class.\50\ One commenter stated that multiply-
listed and exclusively-listed classes should be treated the same 
because otherwise decisions to list new classes could be 
inappropriately influenced by capacity concerns.\51\ One commenter 
recommended that an options class be considered an Included Class if 
the average daily contract volume over three months is 50 contracts and 
the class is multiply-listed, and if the average daily contract volume 
over three months is 100 contracts and the class is exclusively-
listed.\52\ This commenter believed that these ``more realistic 
thresholds'' would ``encourage all OPRA participants to consider 
delisting inactively traded products.'' Another commenter contended 
that an options class should be considered an Included Class if the 
exchange traded a minimum average of 40 contracts per day for both 
multiply-listed and exclusively-listed classes.\53\
---------------------------------------------------------------------------

    \50\ See Amex Letter; CBOE Letter; ISE Letter; PCX Letter; Phlx 
Letter; and Susquehanna Letter.
    \51\ See Susquehanna Letter.
    \52\ See Amex Letter.
    \53\ See CBOE Letter. As an alternative to the Commission's 
proposal, the CBOE proposed that capacity be allocated for Included 
Classes based on the average number of quotes-to-cleared 
transactions. Each exchange's allocation would be adjusted by an 
exchange's efficiency, which would be determined by measuring an 
exchange's quote-to-trade ratio. The CBOE proposed to include a 
temporary minimum guarantee to all exchanges of 8% of the total OPRA 
capacity.
---------------------------------------------------------------------------

    Two commenters argued that determining which options classes are 
Included Classes should be based on industry-wide volume, rather than 
the volume on a particular exchange.\54\ One of these commenters 
contended that using exchange-specific volume criteria to determine an 
Included Class would inappropriately reward exchanges that have an 
established market share in an options class and would discourage 
exchanges from listing new products to compete in actively-traded 
issues.\55\ One of these commenters recommended that to eliminate this 
result an Included Class be any class with an average daily volume of 
greater than 25 customer contracts on an industry-wide basis for the 
last three months.\56\
---------------------------------------------------------------------------

    \54\ See ISE Letter and Phlx Letter.
    \55\ See ISE Letter.
    \56\ Alternatively, the ISE suggested that ``Included Classes'' 
be defined as options classes with 15, or with 50, average daily 
customer contracts. See ISE Letter.
---------------------------------------------------------------------------

    With respect to the number of customer contracts required to be 
traded for an options class to be an Included Class, the Commission is 
adopting a requirement of 15 customer contracts for multiply-listed, 
and 25 contracts for exclusively-listed, options classes. These numbers 
are supported by the analysis conducted by Commission staff that 
indicates that approximately 93% of all multiply-listed options classes 
trade, on average, more than 15 customer contracts per day. In 
addition, approximately 60% of all exclusively-listed options classes 
that traded at least one contract over the period, on average, trade 
more than 25 customer contracts per day.\57\ The Commission continues 
to believe that it is important to determine whether an options class 
is an Included Class on an exchange-by-exchange basis, rather than on 
an industry-wide basis, as suggested by commenters, to avoid 
encouraging the listing of new products solely to obtain additional 
capacity. The Commission believes that the approach it is adopting 
today ameliorates concerns about discouraging exchanges from listing 
new products by allocating an equal portion of one-third of available 
capacity to each options exchange.\58\
---------------------------------------------------------------------------

    \57\ Commission staff's analysis relies on Options Clearing 
Corporation data on average daily trading volume for the period 
January 1, 2000 through September 11, 2000 for options classes that 
traded, on average, more than zero customer contracts per day during 
this period.
    \58\ As an additional protection for new exchanges that may not 
have had enough time to attract, on average, 15 customer contracts 
each day in multiply-traded options classes, the formula being 
adopted today allows such exchanges to elect to receive a slightly 
greater than equal portion of one-third available capacity. See OPRA 
Plan, Section V(d)(i).

---------------------------------------------------------------------------

[[Page 75570]]

    Finally, one commenter argued that active trading in options 
classes generates a larger number of quotes, which must be reflected in 
an exchange's capacity allocation.\59\ In response to the commenter's 
assertion that higher volume exchanges require more capacity than lower 
volume exchanges, Commission staff conducted analysis that indicated 
that in a given option, the exchange that executed the most trades was 
no more likely to generate the most quotes than any of the other 
exchanges that traded the option. Therefore, there is not necessarily a 
direct relationship between the volume of trading and the number of 
quotations generated by a given market in a particular options class. 
Instead, other factors, such as the volatility of the price of the 
underlying security, more directly affect the number of quotations 
generated for a particular options class. Nonetheless, the Commission 
believes that the approach adopted today allocates greater capacity to 
the exchanges that list more options classes that exceed the minimum 
volume threshold, which partly achieves the commenter's objectives.
---------------------------------------------------------------------------

    \59\ See CBOE Letter.
---------------------------------------------------------------------------

3. Comments on Allocating Capacity Equally Among the Options Exchanges
    Proposed Alternative B was premised on an equal allocation of 
capacity among the options exchanges, with adjustments based on a 
measure of quoting efficiency. One commenter stated its general support 
for equal allocation of capacity among the exchanges, but objected to 
the formulae proposed by the Commission, arguing that it would reward 
markets for achieving trading volumes that were not necessarily related 
to aggressive or efficient quoting, but may be attributable, instead, 
to factors such as payment for order flow, internalization, and other 
arrangements between market participants and order flow providers.\60\ 
Another commenter suggested allocating capacity based on three 
different factors, each of which would be used to allocate one-third of 
the total OPRA system capacity. The first one-third of OPRA capacity 
would be allocated equally among the exchanges under the plan proposed 
by this commenter.\61\
---------------------------------------------------------------------------

    \60\ See Phlx Letter.
    \61\ This commenter proposed that the second one-third of 
capacity be allocated based on the number of active options series 
in those Included Classes traded at each exchange and that the 
remaining one-third of capacity be allocated based on an exchange's 
quoting efficiency. See Amex Letter.
---------------------------------------------------------------------------

    The amendment to the OPRA Plan adopted by the Commission allocates 
to each options exchange an equal portion of one-third of OPRA 
capacity.\62\ The Commission agrees that each exchange that is 
operating an options market requires a minimum amount of OPRA capacity 
to launch new products, regardless of the number of customer contracts 
that it executes. Moreover, the Commission recognizes that there is not 
necessarily a direct correlation between the competitiveness of a 
market's quotes and its trading volume.\63\ Nonetheless, the Commission 
believes that to balance several competing goals, it is appropriate at 
this time to limit the amount of capacity allocated based on no other 
factor than the operation of an options exchange. In particular, the 
Commission must balance the interests of fair competition with the need 
to assure the availability to market participants of timely and 
reliable market data. Balancing these goals requires the Commission to 
recognize that the options exchanges have decided, for competitive 
reasons, not to trade exactly the same products, and consequently, the 
capacity needs of the various markets are not precisely the same.\64\
---------------------------------------------------------------------------

    \62\ As discussed in Section V.B.6 below, an exchange that has 
been operating for fewer than nine months may elect, in lieu of an 
equal portion of one-third of capacity and capacity based on the 
number of Included Classes that it trades, to receive 40% of the 
available capacity divided by the number of options exchanges.
    \63\ See ISE Letter; Phlx Letter; and Susquehanna Letter.
---------------------------------------------------------------------------

4. Comments on Rewarding Quality of Quotes
    In the Proposing Release, the Commission specifically sought 
comment on whether there may be another, more appropriate, performance 
criteria on which to base capacity allocation. One commenter argued 
that neither allocation formula proposed by the Commission created 
incentives to market makers to disseminate quotes that contribute value 
to the marketplace. As an alternative, this commenter recommended that 
the Commission adopt an allocation formula that would identify quotes 
that participate in the national best bid and offer (``NBBO'') and 
reward market makers that generate those quotes.\65\
---------------------------------------------------------------------------

    \64\ For this reason, the Commission did not adopt the Phlx's 
proposal that a portion of the total OPRA capacity be divided 
equally among all the exchanges, with the remaining portion 
allocated based on the average daily trading volume across all 
markets during a calendar quarter. Every quarter, the portion of 
capacity to be divided equally would increase by 10% until all OPRA 
capacity would be divided equally. See Phlx Letter.
    \65\ See Susquehanna Letter.
---------------------------------------------------------------------------

    The Commission agrees that allocating OPRA capacity to those 
markets that disseminate quotes that ``contribute value to the 
marketplace'' would be the preferable way to allocate OPRA capacity 
until a long-term solution is available. In response to the commenter's 
recommendation, Commission staff carefully considered how this 
objective might be integrated into a capacity allocation formula. The 
Commission concluded, however, that this objective could not be 
accomplished at this time because of the anticipated difficulty in 
implementing an NBBO-based formula in the absence of a consolidated 
NBBO in the options market.
5. Comments on Anticompetitive Aspects of Allocation Formula
    As discussed above, several commenters argued that the allocation 
formulae proposed by the Commission are anticompetitive because the 
options exchanges would be discouraged from listing new products and 
capacity would be allocated to higher volume exchanges to the detriment 
of newer and smaller volume exchanges.\66\ The Commission agrees with 
the commenters that the existence of an allocation formula may 
influence the behavior of certain market participants. Specifically, 
individual markets may determine not to list certain new products 
because of a concern that insufficient order flow would be attracted 
initially and would prevent the exchange from earning capacity credit 
for those products.
---------------------------------------------------------------------------

    \66\ See ISE Letter; PCX Letter; and Phlx Letter.
---------------------------------------------------------------------------

    The Commission supports the efforts of the options exchanges to 
actively compete for order flow, and encourages the markets to consider 
listing new products to satisfy investor demand. In response to the 
commenters' concerns that a capacity allocation formula is antithetical 
to competition, however, the Commission believes that it is not the 
existence of an allocation formula, per se, that limits the exchanges' 
ability to generate and disseminate quotation message traffic at will. 
Instead, the source of the restrictions on ``free'' competition is the 
anticipated limitations on the availability of OPRA systems capacity, 
in that the demand on capacity is expected to exceed the supply. The 
Commission has encouraged the exchanges to develop their own allocation 
methodology.\67\ An allocation formula, such as the one adopted by the 
Commission today, is

[[Page 75571]]

necessary because the exchanges have not sufficiently planned for the 
amount of capacity their business would need, been able to agree on 
allocation of the limited amount of capacity available, or developed 
strategies to mitigate the amount of market data generated. The 
allocation methodology adopted today is critical to ensure that the 
exchanges, in the aggregate, transmit no more market data to OPRA than 
the available capacity allows OPRA to disseminate in a timely manner to 
information vendors. In the absence of such limits, fair and orderly 
markets and the protection that investors receive from timely and 
accurate market data would be jeopardized.
---------------------------------------------------------------------------

    \67\ See Securities Exchange Act Release No. 41843 (September 8, 
1999), 64 FR 50126 (September 15, 1999).
---------------------------------------------------------------------------

6. Comments About New Exchanges
    Proposed Alternative A would have treated all options classes 
listed on an exchange that has been operating for fewer than nine 
months as Included Classes for purposes of determining capacity 
allocation. Proposed Alternative B would have provided all exchanges, 
including new exchanges, with a minimum level of OPRA capacity, which 
the Commission proposed to be 15%.
    Commenters recommended alternatives to the Commission's proposal to 
consider options classes listed by new options exchanges to be Included 
Classes for the first nine months of operation.\68\ One commenter 
argued that the proposed nine-month period was both excessive and 
arbitrary.\69\ Two commenters contended that existing exchanges would 
be placed at a competitive disadvantage if the Commission were to allow 
new exchanges a nine-month window to list options classes.\70\
---------------------------------------------------------------------------

    \68\ See CBOE Letter; ISE Letter; Phlx Letter; PCX Letter; and 
Susquehanna Letter.
    \69\ See Phlx Letter.
    \70\ See Susquehanna Letter and PCX Letter.
---------------------------------------------------------------------------

    Several commenters offered alternative accommodations for new 
exchanges.\71\ Specifically, one commenter proposed allocating new 
exchanges a minimum amount of capacity for the first four months of its 
operation. After the first four months, a new exchange would be 
allocated capacity using the same formula as the existing 
exchanges.\72\ Another commenter proposed, as an alternative, that new 
exchanges be allowed a one-year phase-in period. Under this approach, a 
new exchange, during its first year of operation, would provide the 
names of the options classes that it intended to list for an upcoming 
quarter and capacity would be allocated for each class based on an 
industry-wide volume threshold. Alternatively, this commenter suggested 
that the Commission extend its proposal to permit a new exchange to 
count all the option classes it lists from nine months to a year and a 
quarter.\73\
---------------------------------------------------------------------------

    \71\ See CBOE Letter and ISE Letter.
    \72\ Under the CBOE proposal, a new exchange would receive 
approximately 2% of total available capacity during the first month, 
and 1% each month. After four months, the new exchange would be 
allocated 5% of total capacity. See CBOE Letter.
    \73\ The ISE states that the nine-month grace period proposed by 
the Commission for new exchanges would be insufficient to 
accommodate ISE's planned phase-in of 600 options classes during its 
first year of operation. See ISE Letter.
---------------------------------------------------------------------------

    The capacity allocation formula adopted by the Commission provides 
that, during a new exchange's first quarter of operation, or any 
portion thereof, it will receive an allocation equal to 40% of 
available capacity divided by the total number of options 
exchanges.\74\ For each quarter thereafter, a new exchange may decide 
whether to receive a capacity allocation (1) equal to 40% of available 
OPRA systems capacity divided by the total number of options exchanges; 
or (2) based on the same formula used to determine the capacity 
allocated to all other exchanges. An exchange that has been operating 
for fewer than 270 calendar days will make an election five business 
days following the end of a calendar quarter regarding which method 
under which it wishes to receive a capacity allocation. New markets 
will be treated the same as existing exchanges after the end of their 
first year of operation.\75\
---------------------------------------------------------------------------

    \74\ If an options exchange begins to trade other than on the 
first of February, May, August, or November, each other options 
exchange's capacity will be recalculated pursuant to Section V 
(d)(ii)(B) of the OPRA Plan, using data from the most recent 
capacity allocation, except that any options exchange that was 
qualified for, and election to receive, the fixed new exchange 
allocation in the most recent quarterly allocation, will receive a 
new exchange allocation.
    \75\ Because a new exchange that has been operating for fewer 
than 270 days on the fifth business day following the end of a 
calendar quarter will make its election for the next allocation 
period, capacity will be allocated to new exchanges under this 
scheme for their first year of operation.
---------------------------------------------------------------------------

    The Commission believes that this approach, which provides an 
emerging market one year to establish its business and flexibility in 
determining its capacity allocation, adequately balances the 
Commission's interest in providing new markets with the capacity that 
they need to compete with existing exchanges, with its interest in not 
unfairly disadvantaging existing exchanges. In addition, the Commission 
believes this approach is responsive to concerns that by allowing new 
exchanges to treat all options listed as Included Classes, as proposed 
in Alternative A, new exchanges might be encouraged to list all or a 
substantial number of options classes currently traded.

VI. Costs and Benefits of the OPRA Plan Amendment

    The Commission is adopting amendments to the OPRA Plan to allocate, 
among the options exchanges, OPRA's peak period message handling 
capacity. The Commission believes that these amendments are necessary 
because of the OPRA participants' inability to agree on how to allocate 
capacity among themselves and the inability to increase OPRA systems 
capacity within the short-term to a level sufficient to permit the 
exchanges to generate message traffic without restraint.
    Although the Commission's adoption of a capacity allocation formula 
inhibits the exchanges' ability to generate and send to OPRA unlimited 
quotations, this is a direct consequence not of the formula, but of the 
fact that OPRA has limited capacity. The Commission is adopting these 
amendments as a short-term solution and only after the OPRA 
participants themselves have been unable to reach agreement on an 
objective capacity allocation formula. As a more permanent solution, 
the Amex, CBOE, PCX, and Phlx have consented, as part of their 
settlement of an enforcement action with the Commission, to, among 
other things, modify the organizational structure and operation of OPRA 
so that each exchange will independently determine the amount of 
capacity that it will obtain.\76\
---------------------------------------------------------------------------

    \76\ See SEC Order, supra note 4.
---------------------------------------------------------------------------

    The capacity allocation formula adopted today, which will be 
calculated quarterly and applied only when the exchanges' demand for 
OPRA capacity exceeds its supply, combines a number of elements found 
in the two alternative formulae proposed by the Commission, and 
incorporates several modifications recommended by commenters.
    The formula adopted by the Commission allocates to each options 
exchange an equal portion of one-third of available OPRA systems 
capacity. This means that each exchange would have available at least 
533 messages per second with the current 8,000 message per second 
capacity of OPRA. When OPRA capacity is expanded to 12,000 messages per 
second, as it is expected to be by year-end, each exchange would have 
available at least 800 messages per second.
    The capacity remaining after the allocation described above and any 
allocation to new exchanges as

[[Page 75572]]

described below, will be allocated among the exchanges based upon a 
variation of Proposed Alternative A, as set forth in the Proposing 
Release.\77\ Specifically, this remaining OPRA systems capacity will be 
allocated to the exchanges based on the average quotation message 
traffic generated during the last full hour of the trading day, 3 p.m. 
to 4 p.m. eastern time. An exchange will receive an allocation only for 
those options classes for which at least a minimum number of customer 
contracts \78\ are traded on that exchange. The formula does not 
allocate capacity to an exchange for a particular options class in 
which the exchange's average daily contract volume over a calendar 
quarter does not exceed 15 customer contracts for multiply-listed 
options classes and 25 customer contracts for exclusively-listed 
options classes.\79\ Exchanges will not be given additional capacity 
for new listings that do not trade the minimum number of customer 
contracts set forth above.
---------------------------------------------------------------------------

    \77\ See, infra Section II.
    \78\ For purposes of the formula, the term ``customer contract'' 
is defined as an options contract executed on an options exchange 
and cleared in a customer account at a registered clearing agency. 
See OPRA Plan, Section III (m).
    \79\ The term ``options class'' is defined in OPRA Plan, Section 
III (n), and includes options on groups or indexes of securities.
---------------------------------------------------------------------------

    Because new exchanges may not have had time to develop their 
business to attract a sufficient number of customer contracts to meet 
the minimums set forth above, such exchanges may instead elect to 
receive an allocation of OPRA systems capacity slightly greater than an 
equal portion of one-third of available capacity. Specifically, during 
its first nine months of operation, a new exchange will be permitted to 
elect whether to accept a capacity allocation equal to 40% of available 
capacity divided by the total number of options exchanges, or to be 
treated the same as all other exchanges under the formula. New markets 
will be treated the same as existing exchanges after the end of their 
first nine months of operation.

A. Response to Comments

    In the Proposing Release, the Commission requested comment on the 
anticipated costs and benefits associated with the proposed allocation 
alternatives to the OPRA Plan, as well as any possible anticompetitive 
impact of the Proposed Alternatives.\80\ Specifically, the Commission 
requested commenters to address whether either of the Proposed 
Alternatives would generate anticipated benefits or impose any costs on 
U.S. investors or others.
---------------------------------------------------------------------------

    \80\ See Proposing Release, Supra note 18.
---------------------------------------------------------------------------

    Several commenters shared the Commission's concern about OPRA 
capacity.\81\ Currently, OPRA has the capacity to handle 8,000 messages 
per second. While the options exchanges currently have a slight 
capacity cushion,\82\ the Commission continues to be concerned that the 
full implementation of decimal pricing, ISE's complete roll-out of new 
listings, and OPRA's planned dissemination of quotes with size may 
cause peak quoting rates to soon exceed OPRA systems capacity.\83\ The 
Commission, therefore, believes that the allocation formula that it is 
adopting today is necessary to avoid delayed quotes that may result if 
the full implementation of decimal pricing, complete roll-out of ISE, 
and the dissemination of quotes with size causes the demand for OPRA 
systems capacity to exceed the supply.
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    \81\ See CBOE Letter; Phlx Letter; Susquehanna Letter; SIAC 
Letter; PCX Letter; ISE Letter; and Amex Letter.
    \82\ On August 1, 2000, OPRA reported a one-minute peak of 3,581 
messages per second. While this peak does not exceed OPRA's current 
capacity, in the recent past, the options exchanges have come 
dangerously close to exceeding OPRA's capacity. See Proposing 
Release, supra note.
    \83\ On August 28, 2000, decimal pricing on 13 exchange-listed 
stocks, three of which were optionable, began trading in decimals. 
See letter from Joe Corrigan, Executive Director, OPRA, to OPRA 
Market Data Recipients, dated August 17, 2000. On September 25, 
2000, however, 106 additional exchange-listed stocks, 33 of which 
are optionable, began decimal pricing. On November 1, 2000, all of 
the exchanges and the Commission will determine whether to convert 
all listed stocks and all options to decimal pricing on December 4, 
2000. In addition, as of October 5, 2000, ISE had begun trading 
options on 141 of its planned 600 classes.
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    Commenters also raised concerns regarding the Proposed 
Alternatives, which are addressed in detail above, that implicitly 
raise issues as to the costs associated with allocating capacity. 
Generally, commenters believed, in part, that the proposed alternatives 
could impact an exchange's decision to list certain types of 
products,\84\ create disincentives to list new options,\85\ fail to 
provide an incentive to quote economically,\86\ lock-in market 
share,\87\ or lead to anticompetitive results because the options 
exchanges would be discouraged from listing new products and capacity 
would be allocated to higher volume exchanges to the detriment of newer 
and smaller volume exchanges.\88\ In addition, six commenters opposed 
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 citing 
the difficulty in obtaining such information for the proposed time 
period.\89\ Specifically, commenters complained that it would be 
difficult to process the required raw data due to the lack of clarity 
as to when a particular market has completed its opening rotation.
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    \84\ See Susquehanna Letter.
    \85\ See Phlx Letter.
    \86\ See Phlx Letter.
    \87\ See ISE Letter.
    \88\ See ISE Letter; PCX Letter; and Phlx Letter.
    \89\ See Amex Letter; CBOE Letter; ISE Letter; Susquehanna 
Letter; PCX Letter; and Phlx Letter.
---------------------------------------------------------------------------

B. Benefits

    Absent a mechanism to fairly allocate OPRA systems capacity among 
the markets, investors may be forced to rely on stale or delayed quote 
and trade information in making their investment decisions. Thus, the 
principal benefit of the amendments being adopted is to avoid the 
potential harm to market participants and investors associated with 
delayed quotes and trade information, while contributing to efficient 
price discovery and the best execution of customers' orders by their 
brokers. If peak quoting rates exceed OPRA systems capacity, queuing 
may occur and stale or incomplete market data may be transmitted to 
market participants and investors, thereby reducing market transparency 
and hampering efficient price discovery. Specifically, if the options 
market data sent by the exchanges to OPRA exceeds OPRA system capacity 
to publicly disseminate it on a real-time basis, only those market 
participants located on the floor of an exchange receive real-time 
market information. Therefore, the Commission believes that the 
allocation formula should help ensure that timely and reliable real 
time market information is available to investors to rely on in making 
trading and investment decisions.
    In addition, the Commission notes that the adoption of an 
allocation formula will eliminate the need for the options exchanges to 
continuously negotiate the allocation of OPRA system capacity as any 
allocation that is needed can be accomplished in an objective and 
transparent manner. The allocation formula adopted today will allow the 
options exchanges to focus their resources on other things, such as 
developing an amendment to the OPRA Plan that will allow each exchange 
to independently determine the amount of capacity that it will 
obtain.\90\ Therefore, the Commission believes that the

[[Page 75573]]

adoption of the allocation formula will reduce the work of the 
exchanges and thereby, allow the exchanges to allocate their resources 
to other priorities.
---------------------------------------------------------------------------

    \90\ As noted above, this year the options markets have had to 
agree, on six separate occasions, to allocate OPRA systems capacity. 
See Section II, Background, supra.
---------------------------------------------------------------------------

    The Commission also believes that, until sufficient capacity is 
available to the options markets to handle projected message traffic 
growth, the capacity allocation formula adopted by the Commission today 
should help to ensure that scarce OPRA systems capacity is allocated in 
an objective and transparent manner. The Commission continues to 
believe 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 peak usage periods, the options 
markets should be able to disseminate options market data on a real-
time basis, which should foster competition. Further, allocating 
capacity should help maintain efficient and orderly markets for options 
by ensuring that current market data is continuously available and 
reliable. Finally, allocating capacity in an objective and transparent 
manner will enable the exchanges to better manage their demand for OPRA 
system capacity and should encourage each exchange to establish and 
utilize efficient quote reduction methods based on the amount of 
message capacity it has been allocated, thereby promoting efficiency.

C. Costs

    The Commission has carefully considered the concerns raised by the 
commenters. First, the Commission recognizes that the options exchanges 
will incur certain costs in determining their average quotation message 
traffic for purposes of the calculation of Included Classes. These 
costs may include a one-time systems cost to establish a program to 
calculate which options classes traded by each exchange satisfy the 
definition of Included Classes. In addition, there may be ongoing costs 
associated with assigning staff to perform the calculation on a 
quarterly basis. Nonetheless, the Commission notes that the options 
exchanges routinely compile much of this information, although the data 
may have to be slightly reconfigured for the calculation of Included 
Classes.
    Second, the Commission recognizes the validity of commenters' 
concerns that the existence of an allocation formula may discourage 
options exchanges from listing new products and capacity may be 
allocated to higher volume exchanges to the possible detriment of new 
and smaller volume exchanges. To address these concerns, the allocation 
formula adopted by the Commission provides each exchange with a minimum 
capacity allocation, regardless of the volume or activity on other 
exchanges. This certain allocation should allow exchanges to launch new 
products in order to compete with larger, more established exchanges. 
In addition, the Commission, by adopting the allocation formula, is not 
dictating how each exchange allocates its capacity within its own 
market. Instead, each options exchange will be able to determine 
whether to use its capacity for new or existing products.
    Finally, in response to commenters' concerns about the costs 
associated with the perceived anticompetitive impact of an allocation 
formula, the Commission notes that it is not the existence of an 
allocation formula, per se, that limits the exchanges' ability to 
generate and disseminate quotation message traffic at will. Instead, 
the source of the restriction on ``free'' competition is the 
anticipated limitation on the availability of OPRA systems capacity, in 
that the demands on capacity are expected to exceed supply. An 
allocation formula, such as the one adopted by the Commission today, is 
necessary because the exchanges have not sufficiently planned for the 
amount of capacity their business would need, been able to agree on 
allocation of the limited amount of capacity available, or developed 
strategies to mitigate the amount of market data generated. The 
allocation methodology adopted today is critical to ensure that the 
exchanges, in the aggregate, transmit no more market data to OPRA than 
the available capacity allows OPRA to disseminate in a timely manner to 
information vendors. In the absence of such limits, fair and orderly 
markets and the protection that investors receive from timely and 
accurate market data would be jeopardized.

D. Conclusion

    It is important to emphasize that the allocation formula adopted by 
the Commission today is merely a short-term solution while the options 
exchanges look for a more permanent solution to the capacity issue 
pursuant to their settlement agreement with the Commission.\91\ Based 
on the comments and its own analysis, the Commission believes that the 
OPRA plan amendments adopted today provide a reasonable allocation of 
capacity among the options exchanges. First, by ensuring that each 
options exchange receives a minimum capacity allocation, the formula 
ensures that each exchange retains a basic amount of capacity at all 
times, regardless of the activity or actions of the other exchanges. 
Second, by measuring average quotation message traffic, the formula 
takes into account the individual needs of each exchange, while relying 
on a minimum volume threshold to avoid creating incentives for markets 
to list products solely for the purpose of increasing their capacity 
allocation. Third, the formula provides a new exchange with capacity to 
operate without encouraging it to irresponsibly list options classes 
solely to obtain capacity. Finally, each exchange will retain the 
flexibility to determine how best to allocate its capacity allocation 
within its own market.
---------------------------------------------------------------------------

    \91\ See SEC Order, supra note 4.
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    In addition, the Commission recognizes that there are always costs 
associated with allocating a finite resource among users.\92\ In fact, 
there are costs associated with the way the markets have been 
allocating capacity among themselves; \93\ namely, the failure to 
provide incentives for the exchanges to reduce excessive quoting of 
existing listings and to add new listings only with a sound business 
rationale. The allocation formula adopted by the Commission today, 
which combines several elements of the alternative formulae proposed by 
the Commission in its Proposing Release and incorporates specific 
recommendations of commenters, is intended to minimize the impact on 
any one options exchange and to take into account the differences 
between the options exchanges. Therefore, while the Commission 
recognizes that the capacity allocation formula being adopted today 
may, on a short-term basis, limit the ability of the exchanges' to 
generate and send to OPRA unlimited quotations during peak quotation 
periods, the Commission believes that the allocation formula balances 
this concern with the needs of investors and other market participants 
in having timely and reliable market information to use to make 
informed investment and trading decisions.
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    \92\ The Commission notes, however, that the options exchanges 
are already allocating existing OPRA capacity during peak periods on 
six occasions, while continuing to work on other short-term 
mitigation strategies. See supra note 4.
    \93\ As discussed above, the options markets have reluctantly 
agreed on separate occasions to allocate existing OPRA capacity 
among themselves during peak periods through temporary amendments to 
the OPRA Plan. 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.

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[[Page 75574]]

VII. Effects on Competition, Efficiency, and Capital Formation

    Section 23(a)(2) of the Act \94\ requires that the Commission, when 
promulgating rules under the Act, to consider the impact any rule would 
have on competition and to not adopt any rule that would impose a 
burden on competition that is not necessary or appropriate in the 
public interest. In the Proposing Release, the Commission solicited 
comment on the effects on competition, efficiency, and capital 
formation of the proposed amendments. Specifically, the Commission 
requested commenters to address how the proposed amendments would 
affect competition between and among the options exchanges, market 
participants, and investors and how the proposed amendments would 
affect efficiency and capital formation. The Commission received four 
comment letters that specifically addressed these issues.\95\
---------------------------------------------------------------------------

    \94\ 15 U.S.C. 78w(a)(2).
    \95\ See CBOE Letter; ISE Letter; Phlx Letter; and PCX Letter, 
supra note 66.
---------------------------------------------------------------------------

    The commenters expressed general concerns about the competitive 
implications of the proposed rules.\96\ For example, one commenter 
stressed that allocating OPRA systems capacity should not come at the 
expense of competition among the exchanges.\97\ Another commenter 
argued that any objective allocation formula proposed by the Commission 
should account for each exchange's individual performance to encourage 
competition and provide incentives for each exchange to improve its 
efficiency and increase its volume and order flow.\98\ Two commenters 
emphasized that fundamental to any allocation formula should be that it 
promote competition and not preserve the market share of any options 
exchange.\99\ Finally, one commenter supported the Commission's efforts 
to create an equitable methodology to allocate OPRA systems capacity, 
but cautioned that competition between the options markets should not 
be artificially restricted.\100\
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    \96\ The commenters generally directed their specific concerns 
to the two alternative formulae proposed by the Commission in the 
Proposing Release. As discussed above, the Commission has determined 
to adopt a modification of the two alternative proposals. Therefore, 
this discussion is limited to the general comments raised concerning 
the competitive aspects of allocating OPRA capacity.
    \97\ See Phlx Letter.
    \98\ See CBOE Letter.
    \99\ See ISE Letter and Phlx Letter.
    \100\ See PCX Letter.
---------------------------------------------------------------------------

    The Commission has considered the comments and the amendments in 
light of the standards cited in Section 23(a)(2) of the Act \101\ and 
believes that the amendments to the OPRA Plan adopted today likely 
would not impose any significant burden on competition that is not 
necessary or appropriate in furtherance of the Act. The Commission 
recognizes that allocating OPRA systems capacity among the OPRA 
participants does raise competitive concerns because capacity 
allocation inherently limits an exchange's ability to freely generate 
an unlimited number of quotes, which may restrict an exchange's ability 
to compete with other markets on the basis of price. However, the 
Commission believes that it is not the existence of an allocation 
formula that could limit competition between the options exchanges. 
Instead, any restriction on competition is caused by the limitations, 
both previously experienced and further anticipated, on the 
availability of OPRA systems capacity, in that the demands on capacity 
are expected to exceed the supply.
---------------------------------------------------------------------------

    \101\ 15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------

    As described above, OPRA systems capacity is limited. Thus, in 
times of high market volume or market volatility, there may not be 
sufficient systems capacity to accommodate the message traffic 
generated by the options exchanges, which could lead to queuing of all 
or a substantial portion of options market data that is sent by each 
options exchange to OPRA for dissemination to the public. Further, the 
demand for OPRA systems capacity is expected to increase upon the full 
implementation of decimal pricing. Therefore, the Commission has 
determined that a fair and objective formula to allocate the limited 
systems capacity during times when the systems capacity is not 
sufficient to handle excess message traffic is necessary to help ensure 
that allocation is completed in an objective and transparent manner. 
The amendments to the OPRA Plan, therefore, provide a means to 
distribute capacity equitably among the exchanges during those times 
when OPRA systems capacity is insufficient.
    By using an objective allocation formula to determine each 
exchange's message traffic limits during peak usage periods, the 
Commission believes that each options exchange will be able to continue 
to disseminate on a real-time basis its options market data, which 
should maintain price competition, and preserve liquidity and 
transparency for all market participants, including retail investors. 
If capacity constraints are not addressed and capacity is not 
objectively allocated, the dissemination of all options market data 
could be compromised, which could halt all price competition among the 
exchanges and result in investors receiving executions at prices that 
do not reflect the current market. Further, investors would be unable 
to make informed order-routing decisions because, if the system is 
overloaded by excessive message traffic, the systems could queue, 
leading to the dissemination of stale or incomplete market data. The 
allocation of capacity in an objective and transparent manner will 
enable each exchange to continue to disseminate its options market data 
on a real-time basis, thus enabling competition, albeit limited, to 
continue during high volume or high volatility times and enabling 
investors to make informed market decisions.
    In adopting these amendments, the Commission has determined that 
the action is necessary and appropriate in the public interest for the 
protection of investors, and has considered the amendments' impact on 
efficiency, competition, and capital formation.\102\ The Commission 
believes that the allocation formula should enhance the ability of the 
options exchanges to operate in an efficient and orderly manner by 
ensuring that current market data is constantly available. By having an 
objective allocation formula, each market will be able to determine and 
plan how to best operate during times when allocation of OPRA systems 
capacity is necessary. Further, the allocation formula should encourage 
each individual exchange to establish and utilize quote reduction 
methods based on the amount of message capacity it has been allocated, 
thereby promoting efficiency of the market data dissemination process. 
As discussed in greater detail above, the Commission has considered the 
amendments' impact on competition and believes that any restriction on 
competition is caused not by the Commission's adoption of an allocation 
formula, but by the limited supply of OPRA systems capacity. Finally, 
the Commission believes that the proposed amendments to the OPRA Plan, 
which should help to ensure the availability of timely and reliable 
real-time market data should enhance public confidence in the integrity 
of the options markets and consequently, facilitate capital formation.
---------------------------------------------------------------------------

    \102\ 15 U.S.C. 78c(f).
---------------------------------------------------------------------------

VIII. Summary of Final Regulatory Flexibility Analysis

    A Final Regulatory Flexibility Analysis (``FRFA'') has been 
prepared in accordance with the provisions of the Regulatory 
Flexibility Act (``Reg. Flex.

[[Page 75575]]

Act''),\103\ regarding the Commission's adoption of amendments to the 
OPRA Plan establishing a formula to allocate the message capacity of 
the OPRA system among the participant exchanges.\104\ An Initial 
Regulatory Flexibility Analysis (``IRFA'') was prepared in accordance 
with 5 U.S.C. 603 and was made available to the public.\105\ The 
Commission received one comment directly relating to the IRFA prepared 
in connection with the Proposing Release.\106\ In addition, the 
Commission notes that amendments to the OPRA Plan are being adopted in 
substantially the same format as proposed, incorporating certain 
recommendations from commenters. As a result, the FRFA is in 
substantially the same format as the IRFA.
---------------------------------------------------------------------------

    \103\ 5 U.S.C. 603(a).
    \104\ Securities Exchange Act 11Aa3-2, 17 CFR 240.11Aa3-2.
    \105\ See Proposing Release, supra note 18.
    \106\ See PCX Letter.
---------------------------------------------------------------------------

    As discussed more fully in the FRFA, the amendments to the OPRA 
Plan would directly affect the five OPRA participant exchanges, none of 
which is a small entity as defined in Rule 0-10 under the Act.\107\ One 
commenter, an OPRA participant exchange, stated that all its members 
would be affected if quotation capabilities were reduced and, as a 
result, small businesses would be impacted by the amendments because 
many of this commenter's members are small entities.\108\ The 
Commission, however, does not believe entities other than the OPRA 
participant exchanges will be directly affected by the amendments.\109\
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    \107\ 17 CFR 240.0-10.
    \108\ See PCX letter.
    \109\ The amendments to the OPRA Plan would directly affect only 
the OPRA participants that operate options markets; namely, Amex, 
CBOE, ISE, PCX, and Phlx, none of which are small entities. See 17 
CFR 240.0-10.
---------------------------------------------------------------------------

    The amendments to the OPRA Plan adopted by the Commission provide 
an equitable method of allocating OPRA capacity among the participant 
exchanges during peak usage periods based on objective criteria. 
Further, the amendments are intended to implement an equitable 
allocation of capacity, which 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 should help 
to avoid delays and queues in the dissemination of options market 
information. The Commission believes that the amendments only apply 
directly to the participant exchanges. Thus, there would be no direct 
impact on small businesses for the purposes of the Reg. Flex. Act. In 
addition, the Commission believes that the OPRA Plan amendments being 
adopted do not establish any new reporting, recordkeeping, or 
compliance requirements for small entities. A copy of the FRFA may be 
obtained by contacting John Roeser, Attorney, Division of Market 
Regulation, Securities and Exchange Commission, 450 Fifth Street, N.W., 
Washington, D.C. 20549-1001.

IX. Conclusion

    The Commission finds that the amendments to the OPRA Plan are 
consistent with the Act, particularly Section 11A. Therefore, the 
Commission hereby amends 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) \110\ and the 
Commission's authority under Section 11A(a)(3)(B) of the Act.\111\
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    \110\ 17 CFR 240.11Aa3-2(b)(2) and (c)(1).
    \111\ 15 U.S.C. 78k-1(a)(3)(B).
---------------------------------------------------------------------------

X. Description of Amendments to the OPRA Plan

    Additions are italicized; deletions are [bracketed].
* * * * *
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) ``Customer Contracts'' means options contracts executed on an 
options exchange and cleared in a customer account at a registered 
clearing agency.
    (n) ``Options Class'' means all of the put option or call option 
series overlying a security, as defined in Section 3(a)(10) of the Act, 
including a group or index of securities.
    (o) ``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 customer contracts per day 
if the options class is multiply-listed; or
    (ii) For which such participant executes during the Relevant 
Calendar Quarter an average of at least 25 customer contracts per day 
if the options class is exclusively-listed.
    (p) Unless qualified for, and electing to receive a New Exchange 
Share, pursuant to paragraph (d)(i) of Section V, 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 
received by OPRA between 3:00 p.m. and 4:00 p.m. eastern time during 
the Relevant Calendar Quarter by all OPRA participants for which such 
class is an Included Class, divided by the number of such OPRA 
participants; or
    (ii) For an exclusively-listed options class, the average quote 
messages received by OPRA during the Relevant Calendar Quarter by the 
OPRA participant between 3:00 p.m. and 4:00 p.m. eastern time.
    (q) ``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.
    (r) ``New Exchange Share'' means 40 percent of OPRA systems 
capacity divided by the number of OPRA participants that are operating 
an options market.
IV. No Change
V. (a)-(c) No change.
    (d) Quarterly Calculation of Capacity Allocation
    (i) On the fifth business day following the end of the Relevant 
Calendar Quarter, each options exchange that has been operating for 
fewer than 270 calendar days will elect whether to accept a capacity 
allocation equal to: (A) the New Exchange Share; or (B) the capacity 
allocation that it would receive under paragraph (d)(ii)(B).
    (ii) 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 systems capacity in an amount equal to:
    (A) Its New Exchange Share, if so elected pursuant to paragraph 
(d)(i) of this Section; or
    (B) The aggregate of:

[[Page 75576]]

    (1) One-third of OPRA systems capacity divided by the number of 
OPRA participants that are operating an options market; and
    (2) The total OPRA systems capacity, less the allocation of any New 
Exchange Share and the total allocation of capacity pursuant to 
paragraph (d)(ii)(B)(1), multiplied by its Allocation Percentage. 
    (iii) OPRA will calculate the capacity allocation specified in 
paragraph (d)(ii) 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 promptly after such calculation is made.
    (e) Notwithstanding paragraph (d) of this Section, for the first 
quarter, or any portion thereof, that an exchange commences trading of 
options, it will be allocated capacity equal to the New Exchange Share. 
If an exchange commences trading of options other than on the first of 
February, May, August, or November, each other options exchange's 
capacity shall be recalculated pursuant to paragraph (d)(ii)(B) of this 
Section, using the Allocation Percentage figures from the most recent 
Relevant Calendar Quarter, except that any options exchange that was 
qualified for, and elected to receive, the New Exchange Share in the 
most recent quarterly allocation, will receive a New Exchange Share.
    (f) [d] Indemnification
    (i)-(ii) No change.
* * * * *

    Dated: November 27, 2000.
    By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-30661 Filed 11-30-00; 8:45 am]
BILLING CODE 8010-01-U