[Federal Register: December 20, 2002 (Volume 67, Number 245)]
[Notices]
[Page 78031-78033]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr20de02-115]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-46992; File No. SR-OPRA-2002-01]
Options Price Reporting Authority; Notice of Filing and Order
Approving for 120 Days an Amendment to the Options Price Reporting
Authority Plan To Establish a Best Bid and Offer Market Data Service
December 13, 2002.
I. Introduction
On February 26, 2002, the Options Price Reporting Authority
(``OPRA'') submitted to the Securities and Exchange Commission (``SEC''
or ``Commission''), pursuant to section 11A of the Securities Exchange
Act of 1934 (``Act'') \1\ and rule 11Aa3-2 thereunder,\2\ an amendment
to the Plan for Reporting of Consolidated Options Last Sale Reports and
Quotation Information (``OPRA Plan'' or ``Plan'').\3\ The proposed
amendment would add to the Plan terms governing the provision by OPRA
of a best bid and offer (``BBO'') for each of the options series
included in OPRA's market data service, and governing the use of the
BBO by vendors. Notice of the proposal was published in the Federal
Register on March 15, 2002.\4\ The Commission received two comment
letters on the proposed OPRA Plan amendment.\5\ On May 30, 2002, OPRA
submitted Amendment No. 1 to the proposal.\6\ On June 13, 2002, OPRA
submitted a letter in response to the comments.\7\ On October 4, 2002,
OPRA submitted Amendment No. 2 to the proposal.\8\ This order approves
the proposal as modified by Amendments No. 1 and 2 for 120 days, and
solicits comment on Amendments No. 1 and 2.\9\
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\1\ 15 U.S.C. 78k-1.
\2\ 17 CFR 240.11Aa3-2.
\3\ OPRA is a National Market System Plan approved by the
Commission pursuant to section 11A of the Act and rule 11Aa3-2
thereunder. See Securities Exchange Act Release No. 17638 (March 18,
1981).
The OPRA Plan provides for the collection and dissemination of
last sale and quotation information on options that are traded on
the participant exchanges. The five participants to the OPRA Plan
that operate an options market are the American Stock Exchange LLC
(''Amex''), the Chicago Board Options Exchange, Inc. (``CBOE''), the
International Securities Exchange, Inc., the Pacific Exchange, Inc.,
and the Philadelphia Stock Exchange, Inc. The New York Stock
Exchange, Inc. 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).
\4\ See Securities Exchange Act Release No. 45532 (March 11,
2002), 67 FR 11727 (``Notice'').
\5\ See letters from Devin Wenig, President, Investment Banking
and Brokerage, Reuters America Inc., dated April 19, 2002 (``Reuters
Letter''), and George W. Mann, Jr., Executive Vice President and
General Counsel, Boston Stock Exchange Inc., dated May 1, 2002
(``BSE Letter''), to Jonathan G. Katz, Secretary, Commission.
\6\ See letter from Joseph P. Corrigan, Executive Director,
OPRA, to John Roeser, Special Counsel, Division of Market Regulation
(``Division''), Commission, dated May 29, 2002 (``Amendment No.
1''). In Amendment No. 1, OPRA proposes to complete the
modifications to its system necessary to enable the system to
provide the BBO service no later than March 31, 2003. In addition,
OPRA proposes a technical correction to clarify that the Plan would
still require the options exchanges to use the OPRA system as the
exclusive means of disseminating options market information.
Finally, OPRA proposes to provide examples under the BBO Guidelines
to describe how OPRA would calculate the BBO.
\7\ See letter from Joseph P. Corrigan, Executive Director,
OPRA, to John Roeser, Special Counsel, Division, Commission, dated
June 12, 2002 (``OPRA Letter'').
\8\ See letter from Joseph P. Corrigan, Executive Director,
OPRA, to John Roeser, Special Counsel, Division, Commission, dated
October 2, 2002 (``Amendment No. 2''). In Amendment No. 2, OPRA
proposes to eliminate the proposed ten contract minimum such that
the disseminated BBO would include the actual size of the best bid
and offer at the time each new price is disseminated.
\9\ See Exchange Act rule 11Aa3-2(c)(4).
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II. Description and Purpose of the Amendment
Under the proposed Plan amendment, OPRA proposes to add a
consolidated BBO service that would disseminate the best bid and offer,
subject to certain exceptions, for each options series.\10\ The BBO for
any series of options would be the highest priced bid and the lowest
priced offer currently being quoted on any of OPRA's participant
exchanges. Subject to the price and size increments discussed below, if
the same best priced bid or offer is quoted on more than one exchange,
the exchange that is quoting at that price for the largest number of
options contracts would be identified by OPRA as the market that is
quoting the best bid or offer. If the same best bid or offer for the
same number of options contracts is quoted on more than one exchange,
the exchange that was first in time to quote that bid or offer for that
number of contracts would be identified as the BBO. Thus, OPRA would
prioritize the BBO on the basis of price, size, and time.
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\10\ OPRA represents that the BBO Service would be implemented
no later than the end of the first quarter of 2003. This would be
accomplished by providing dual feeds to vendors during a phase-in
period, one with BBO information and one without it. See Amendment
No. 1, supra note 6.
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The proposed BBO Guidelines provide that the minimum price
increment for purposes of the BBO would be no less than five cents,\11\
and that, absent a change in the price of the BBO, the minimum size
increment for purposes of the BBO would be no fewer than ten contracts.
In other words, to displace the current BBO by improving the price at
which an options series is quoted, the price improvement must be at
least five cents per contract and, to displace the current BBO by
increasing the number of contracts covered by a quote at the same price
as the current BBO, the new bid or offer must be for at least ten
contracts more than the current BBO. This would not preclude markets
from disseminating bids and offers that improve the current BBO by less
than five cents (to the extent such quotes may be permitted under
applicable exchange rules) or that increase the size at a given
quotation by fewer than ten contracts. Such price or size improvements,
however, would not be reflected in the BBO disseminated by OPRA. Thus,
the BBO, as provided by OPRA, could include an approximation of the
size associated with the best bid and offer actually available.\12\
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\11\ The minimum price variation for option quotes under the
rules of OPRA's participant exchanges is currently five cents for
options trading under $3.00 per share per option contract. See,
e.g., Amex rule 952.
\12\ See Amendment No. 1, supra note 6.
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Currently, vendors are required to include the best bid and offer
from each market and last sale reports for any series included in the
market data service they provide. Under the proposal, OPRA vendors
would have the option to disseminate to customers the consolidated BBO
together with last sale reports for any series of options. In addition
to the BBO service, OPRA would be obligated to continue to offer to
vendors its full market data service, which includes the disseminated
best bid and offer from each of OPRA's participant exchanges. The
proposed amendment also would permit OPRA to contract with vendors
separately for: (i) The last sale reports and the BBO; (ii) or for the
last sale reports, the BBO, and quotation information from each market.
OPRA also could contract separately with vendors for the full market
data service that it currently offers.
In a separate proposal, OPRA proposes changes to its vendor
agreement which, if approved, would
[[Page 78032]]
affect the manner in which vendors disseminate information to end
users.\13\ Specifically, under OPRA's vendor agreement proposal,
vendors could choose to disseminate only the BBO and last sale
information. Moreover, the proposal would permit vendors to exclude
from the BBO the quotation size, or the market identifier associated
with a BBO, or both, so long as in excluding this information the
vendor would not discriminate on the basis of the market in which
quotations are entered. In addition, if a vendor excludes the market
identifier associated with the BBO, it would have to make that
information available to recipients of the service through an inquiry
service provided without additional cost. Further, the proposed vendor
agreement would require any vendor that includes size in its BBO
service to disclose to its customers that the included size is an
approximation of the actual size, and that the actual size is available
on OPRA's full quotation service.
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\13\ See Securities Exchange Act Release No. 46839 (November 14,
2002) (File No. SR-OPRA-2002-03) (``Vendor Agreement Proposal'').
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III. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning Amendments No. 1 and 2 to the proposed Plan
amendment, including whether Amendments No. 1 and 2 are consistent with
the Act. Persons making written submissions should file six copies
thereof with the Secretary, Securities and Exchange Commission, 450
Fifth Street, NW., Washington, DC 20549-0609. Copies of the submission,
all subsequent amendments, and all written statements with respect to
Amendments No. 1 and 2 to the proposed plan amendment that are filed
with the Commission, and all written communications relating to
Amendments No. 1 and 2 to the proposed Plan amendment between the
Commission and any person, other than those withheld from the public in
accordance with the provisions of 5 U.S.C. 552, will be available for
inspection and copying in the Commission's Public Reference Room.
Copies of the filing will also be available at the principal offices of
OPRA. All submissions should refer to File No. SR-OPRA-2002-01 and
should be submitted by January 10, 2003.
IV. Discussion
After careful review, the Commission finds that the proposed OPRA
Plan amendment, as amended by Amendments No. 1 and 2, is consistent
with the requirements of the Act and the rules and regulations
thereunder.\14\ Specifically, the Commission believes that the proposed
OPRA Plan amendment, which would permit OPRA to provide a best bid and
offer market data service to vendors, is consistent with section 11A of
the Act \15\ and rule 11Aa3-2\16\ thereunder in that it is 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. Further, the
Commission finds, as described further below, that it is appropriate to
approve summarily the proposed OPRA Plan amendment as amended upon
publication of this notice on a temporary basis for 120 days. The
Commission believes such action is necessary or appropriate in the
public interest, for the protection of investors or the maintenance of
fair and orderly markets, to remove impediments to, and perfect
mechanisms of, a national market system or otherwise in furtherance of
the purposes of the Act.\17\
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\14\ In approving this proposed OPRA Plan amendment, the
Commission has considered its impact on efficiency, competition, and
capital formation. 15 U.S.C. 78c(f).
\15\ 15 U.S.C. 78k-1.
\16\ 17 CFR 240.11Aa3-2.
\17\ See Exchange Act rule 11Aa3-2(c)(4).
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The Commission received two comment letters regarding the proposed
OPRA Plan amendment.\18\ The two commenters generally did not oppose
OPRA's initiative to establish a BBO for the options markets, but did
express specific concerns regarding the terms of OPRA's proposed Plan
amendment.
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\18\ See BSE letter and Reuters letter, supra note 5.
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In particular, without opposing the dissemination of a BBO in the
options markets, Reuters America Inc. (``Reuters'') stated that a BBO
would not solve the problems caused by exponential growth in options
data over the last ten years.\19\ Reuters' comment letter principally
focuses on the growth in options market data, which it concludes is
``out of proportion to the economic value of the data and threatens to
overwhelm customer systems and adversely impact market
transparency.''\20\ Reuters urges the Commission to undertake a study
prior to approving OPRA's proposal to determine what options
information end users want, alternatives available for providing
information, and what the technological and financial constraints are
in doing so.
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\19\ Reuters is a vendor of options market data. Reuters is an
indirect wholly-owned subsidiary of Reuters Group PLC. See Reuters
Letter, supra note 5.
\20\ See Reuters letter, supra note 5.
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The Commission concurs with Reuters' general concerns regarding the
growth in options market data message traffic. The Commission, however,
does not believe that these concerns mean that the Commission should
delay approval of a new service that will be optional to vendors. As
OPRA noted, it intends that the BBO service would enable vendors to
offer ``a useful market data service to those customers who do not need
the full OPRA service without having to develop and maintain the large-
capacity systems necessary to transmit the full options market data
service to those customers.''\21\ OPRA does not claim that the BBO
service would be a panacea for all capacity-related concerns, and
recognizes that, working with vendors and the Commission, it will
continue to have to address this issue.\22\ In addition, OPRA believes
that, although no one can predict the potential capacity savings to
vendors associated with the BBO service in comparison to OPRA's full
service, such savings would be significant because every quotation
change disseminated over OPRA's full service would likely not result in
a corresponding change to OPRA's BBO quotation. Further, OPRA suggests
that the capacity saving would be greatest if vendors were permitted to
disseminate only the price of the BBO without the size or market
identifier, as proposed in the Vendor Agreement Proposal.\23\ Finally,
OPRA emphasizes that its proposed BBO service is an alternative, not in
addition, to its current full service.
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\21\ See OPRA letter, note 7.
\22\ See OPRA letter, note 7.
\23\ See OPRA letter, note 7. See also Vendor Agreement
Proposal, supra note 13.
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The Commission agrees that the proposal would provide an
appropriate alternative to OPRA's full service for vendors and
subscribers that do not require the full service, and that, although
the size disseminated with the BBO service could be an approximation of
the actual size, the Commission believes this approximate size is a
reasonable alternative for certain market participants. More exact size
information will still be available to market participants through
OPRA's full service. Therefore, the Commission believes that the
proposal is consistent with the Act.\24\ Moreover, although the
[[Page 78033]]
Commission agrees that the BBO service would not resolve all capacity
issues related to options market data, it believes that the BBO service
is a first step in addressing these concerns. Finally, the Commission
notes that this service is an alternative to the current OPRA full
service. Accordingly, for any options series that a vendor chooses to
disseminate market data, the vendor could disseminate last sale
information together with (i) the best bid and offer from each market,
as the vendor agreement currently requires, or (ii) the BBO. The
Commission believes that OPRA's proposal to permit vendors to
disseminate last sale information and a BBO is consistent with the
purposes of Section 11A of the Act because the BBO would include the
essential pricing information market participants need to make informed
investment decisions. Moreover, the BBO would not impede market
competition because all markets have an equal opportunity to be
represented in the BBO. The Commission believes that OPRA's proposed
BBO service would make it easier for vendors to disseminate this
minimum essential market information as an alternative to the full
quotation information or in addition to such information.
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\24\ Under the proposed revisions to the vendor agreement, a
vendor would have to disclose to its customers that the included
size is an approximation of the actual size, and that the actual
size is available on OPRA's full quotation service. See Vendor
Agreement Proposal, supra note 13.
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The Boston Stock Exchange, Inc. (``BSE'') offered support for the
proposal in general but criticized the priority used to determine the
market identifier.\25\ Specifically, the BSE suggested that the
proposal could discourage competition by creating a disincentive for
market makers to improve the price of their quotations. In particular,
BSE argued that because the market identifier for the BBO could change
based solely on an increase to the size of the BBO, OPRA's service
would likely identify only those exchanges that disseminate quotations
with large size. As a result, BSE suggested that order flow providers
would direct their orders to exchanges that improve the size but merely
match the price of the BBO, thereby creating a disincentive for an
exchange to offer a better price as means of attracting order flow.
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\25\ The BSE also raised concerns regarding firm quote
obligations in the options markets generally. The Commission
believes that these obligations are outside the scope of OPRA's
function and are not relevant to the proposed amendment to the OPRA
Plan.
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The Commission is not persuaded by BSE's arguments. An exchange
would have its market identifier associated with the BBO by improving
the price. Therefore, the Commission believes that the proposal would
give market makers an incentive to improve either the price or the size
of a quote, or both. Further, the Commission notes that most
disseminated quotations in the options market are updated automatically
in direct response to changes in the price of the underlying security.
Thus, the Commission believes that in many instances a better quote
results not from a market maker's incentive to be first in time to
establish the best bid or offer but, rather, from a price change in the
underlying security. For this reason, the Commission is not persuaded
by the BSE's argument that OPRA's proposal to calculate the best bid or
offer in the options market on the basis of price and then size
priority.
BSE also suggested that the method proposed to calculate the BBO
was unclear under the guidelines. The Commission believes that the
changes to the proposal in Amendments No. 1 and 2 provide adequate
clarification as to how the BBO would be calculated.\26\
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\26\ See Amendments No. 1 and 2, supra notes 1 and 2. See also,
OPRA letter, supra note 7.
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Finally, the Commission also believes that the proposal is
consistent with the Commission's position in its letter submitted as
amicus curiae in an arbitration proceeding between OPRA and
Reuters.\27\ In this arbitration, OPRA challenged the validity of
Reuters' limited service under which it provides only the last sale and
quotation information for each options class generated by the ``primary
market,'' defined as the market with the greatest volume for the prior
month. The Commission submitted its views on whether Reuters'
dissemination to customers of options prices only from the exchange
with the highest volume is consistent with the OPRA Plan and the Act,
particularly the goals of fostering transparency and competition. The
Commission concluded it was not.
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\27\ See letter to Tamara B. Young, Case Administrator, American
Arbitration Association, from Annette L. Nazareth, Director,
Division, Commission, and David M. Becker, General Counsel,
Commission, dated February 5, 2001.
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Specifically, the Commission took the position that the
dissemination by securities information vendors of timely, accurate,
and complete options quotation and transaction information to market
participants, including public investors, is a critical component of
the national market system as it relates to options. Accordingly, as
the Commission urged in its amicus letter, this means that the market
information disseminated by a vendor must include, at a minimum, for
each series of options included in its service, the last sale
information generated by all exchanges and the best bid and offer
currently available in the marketplace.
The Commission believes that it is appropriate to approve the
proposal summarily upon publication of notice of Amendments No. 1 and 2
to permit OPRA to complete the system modifications necessary to offer
the BBO service to vendors and subscribers, along with the anticipated
capacity savings, which the BBO service should provide, at the soonest
practicable time.
V. Conclusion
It is therefore ordered, pursuant to section 11A of the Act,\28\
and rule 11Aa3-2(c)(4) thereunder,\29\ that the proposed OPRA Plan
amendment, as modified by Amendments No. 1 and 2, (SR-OPRA-2002-01) is
approved until April 12, 2003.
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\28\ 15 U.S.C. 78k-1.
\29\ 17 CFR 240.11Aa3-2(c)(4).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\30\
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\30\ 17 CFR 200.30-3(a)(29).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-32072 Filed 12-19-02; 8:45 am]
BILLING CODE 8010-01-U