FOR IMMEDIATE RELEASE 2000-125 Period for Abrogation of CBOE Filing Expires Washington, DC, September 7, 2000 --The Securities and Exchange Commission announced today that it will take no action to abrogate a proposed fee rule submitted this past July by the Chicago Board Options Exchange ("CBOE"). Under the rule, the CBOE collects fees from market makers and specialists based on transactions occurring on the floor. Then, the CBOE transmits the collected funds to its specialists who use the funds to make marketing payments, including payments to attract order flow. Since the CBOE filing, the American Stock Exchange and the Philadelphia Stock Exchange have submitted similar proposed rule changes, and the Commission expects that the Pacific Stock Exchange will do so shortly. Under section 19(b)(3) of the Securities Exchange Act of 1934, fee filings are effective immediately upon filing with the Commission. The Commission, however, retains a discretionary right for 60 days to abrogate the filing and require the SRO to re-file for approval before the fee can be charged. Because no action has been taken, the proposed CBOE rule will remain in effect, as filed. The Commission typically does not comment when the period for abrogation expires. Considering the current public debate over the CBOE's rule, however, the Commission believes it would be useful to the public to do so. The core objections to the CBOE rule that have been expressed to the Commission are that: (1) payment for order flow that is funded through SRO-mandated fees is more problematic than other, currently existing order flow payment arrangements; (2) the proposed fees amount to a tax on market makers that will raise their cost of doing business and limit or eliminate their ability to improve existing quotes; and (3) implementation of the CBOE rule would force remaining markets to follow suit, leading to a proliferation of payment for order flow arrangements, possibly resulting in increased spreads in all markets. As such, opponents have urged the Commission to abrogate the proposed rule. The Commission does not believe abrogation of the rule would serve the public interest. In short, abrogation of the CBOE's rule would interfere with one market's response to the dynamic order flow patterns, without addressing other forms of payment for order flow and internalization in the options markets. Under current circumstances, direct limitations on any one, or even all, forms of payment for order flow would most likely not address the Commission's continuing concerns with internalization in the options markets. Experience with these practices in the equities markets has made clear that numerous and various forms of reciprocal and other arrangements have developed. Restrictions on one practice may simply lead to the growth of other, less transparent, forms. Greater public disclosure of brokers' order routing decisions -- including a description of payment for order flow and internalization arrangements between brokers and market centers -- in conjunction with decimal pricing have the potential to fuel greater price competition in the equities and options markets. Greater scrutiny of brokers' best execution will help ensure that the benefits of this competition are garnered by investors. The Commission's Office of Economic Analysis, together with the Office of Compliance Inspections and Examinations, is currently conducting a comprehensive study of the development of payment for order flow and internalization in the options markets, and any changes in market quality since multiple listings. The study will assist the Commission in determining whether regulatory action is needed to strengthen price competition and order interaction in the options markets. The study will be completed and made public this November. Background U.S. options markets are in the midst of profound and dynamic structural change. Well-funded, new market entrants are committing enormous capital to secure footholds in the options industry of the future. Established institutions are forming alliances aimed at preserving or enhancing their competitive positions. More and more of the specialist firms are maintaining a presence on most or all options exchanges, each striving to become one-stop destinations for order flow providers. Trends toward consolidation and continued competition between specialist firms and options exchanges for brand name recognition will most likely remain strong. Heightened competition among markets and market participants for order flow, and the shifting order flow patterns it produces, shows no signs of abating. Payment for order flow in the options markets has emerged as a feature of this multi-faceted competition for market share. While these developments continue to unfold, options exchanges are formulating responses based on their particular market characteristics. Among other things, the CBOE's approach is an outgrowth of its strategic commitment to sustaining multiple market makers in its trading pits. In particular, the CBOE has imposed relatively restrictive percentage limitations on its specialists, which cap the specialists' share of order flow. One effect of these limitations is that CBOE specialists have a smaller pool of funds, relative to their competitors on other exchanges, available for payment for order flow. As such, the CBOE perceives a competitive need to tap the resources of the crowd in order to create a competitive pool for payments. The CBOE's proposal is an effort to create such a pool. Given this context, the delay resulting from abrogation of the CBOE's rule could interfere substantially with market forces shaping the options industry. Indeed, with order flow patterns shifting as rapidly and dynamically as we see today, delaying the CBOE's rule implementation raises the risk of market share gains or losses attributable to regulatory timing, a result the Commission is committed to avoiding. # # #