[Federal Register: November 28, 2003 (Volume 68, Number 229)]
[Notices]
[Page 66892-66898]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr28no03-125]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-48822; File No. SR-OPRA-2003-01]
Options Price Reporting Authority; Notice of Filing of and Order
Approving on a Temporary Basis Not To Exceed 120 Days a Proposed
Amendment to the Plan for Reporting of Consolidated Options Last Sale
Reports and Quotation Information and Amendments No. 1 and 2 Thereto To
Revise the Manner in which the Options Price Reporting Authority
Engages in Capacity Planning and Allocates Its Available System
Capacity Among the Parties to the Plan
November 21, 2003.
I. Introduction
Pursuant to Section 11A of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 11Aa3-2 thereunder,\2\ notice is hereby given
that on April 15, 2003 the Options Price Reporting Authority (``OPRA'')
submitted to the Securities and Exchange Commission (``Commission'') an
amendment to the Plan for Reporting of Consolidated Options Last Sale
Reports and Quotation Information
[[Page 66893]]
(``OPRA Plan'' or ``Plan'').\3\ The proposed amendment would revise the
manner in which OPRA engages in capacity planning and allocates
capacity among the exchanges that are parties to the Plan. On July 16,
2003, OPRA submitted Amendment No. 1 to the proposal.\4\ On October 12,
2003, OPRA submitted Amendment No. 2 to the proposal.\5\ This order
approves the proposal as modified by Amendments No. 1 and 2 for a
temporary period not to exceed 120 days, and solicits comment on the
proposal, as amended by Amendments No. 1 and 2.\6\ The text of the
proposed Plan amendment, as amended, is available at OPRA, the
Commission's Public Reference Room, and on the Commission's Web site.
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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), 22 S.E.C. Docket 484 (March 31, 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
are the American Stock Exchange LLC (``Amex''), the Chicago Board
Options Exchange, Inc. (``CBOE''), the International Securities
Exchange, Inc. (``ISE''), the Pacific Exchange, Inc. (``PCX''), and
the Philadelphia Stock Exchange, Inc. (``Phlx'').
\4\ See letter from Michael L. Meyer, Counsel to OPRA, Schiff,
Hardin & Waite, to Deborah Flynn, Assistant Director, Division of
Market Regulation (``Division''), Commission, dated July 15, 2003,
replacing in its entirety the initial proposal filed on April 15,
2003 (``Amendment No. 1''). In Amendment No. 1, OPRA provides
additional discussion of the proposed Capacity Guidelines that
describe the function, authority, and procedures of the Independent
System Capacity Advisor (``ISCA'') and clarified in the proposed
Plan's language and corresponding discussion that the selection of
the ISCA is subject to being filed with the Commission as an
amendment to the Plan, to be put into effect upon filing.
\5\ See letter from Michael L. Meyer, Counsel to OPRA, Schiff,
Hardin & Waite, to Deborah Flynn, Assistant Director, Division,
Commission, dated October 15, 2003 (``Amendment No. 2''). In
Amendment No. 2, OPRA specifies in the proposed Plan's language and
the proposed Capacity Guidelines the ISCA's obligation to maintain
the confidentiality of the information entrusted to it by OPRA's
participants in the capacity planning process.
\6\ 17 CFR 240.11Aa3-2(c)(4).
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II. Description and Purpose of the Amendment
Under the proposed Plan amendment, OPRA proposes to revise the
manner in which OPRA engages in capacity planning and allocates its
available system capacity among the exchanges that are parties to the
Plan. OPRA also proposes to amend Subsections I(a) and I(b) of the OPRA
Plan to make it clear that participation in OPRA is limited to those
self-regulatory organizations (``SROs'') that are engaged in the
business of providing a market for the trading of securities options
and other eligible securities under the OPRA Plan.
The principal purpose of the proposed amendment is to revise the
OPRA Plan in response to the Commission's Order instituting public
administrative proceedings against four of OPRA's participant exchanges
(Amex, CBOE, PCX and Phlx, referred to collectively as the ``respondent
exchanges'') pursuant to Section 19(h)(1) of the Act,\7\ and
specifically in response to Section IV.B.c. of the Order (the
``Undertaking''). The Undertaking requires each of the four respondent
exchanges, acting jointly with all other options exchanges,\8\ to
modify the structure and operation of OPRA in various ways that would
eliminate much of the need for joint and collective action in the
capacity planning and allocation process. The three specific
requirements of the Undertaking and the manner in which the proposed
amendment is intended to satisfy these requirements are described
below.
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\7\ Order Instituting Public Administrative Proceedings Pursuant
to Section 19(h)(1) of the Act, Making Findings and Imposing
Remedial Sanctions. Securities Exchange Act Release No. 43268, dated
September 11, 2000 and Administrative Proceeding File 3-10282
(``Order'').
\8\ ISE is not a respondent exchange subject to the Order.
Nevertheless, as a party to the OPRA Plan, ISE participated fully in
all of the discussions that led to the approval of the proposed
amendment, and it joined with the other parties in approving the
proposed amendment and authorizing its filing with the Commission.
The respondent exchanges must establish a system for procuring and
allocating options market data transmission capacity that eliminates
joint action by the participants in OPRA in determining the amount of
total capacity procured and the allocation thereof, and provides that
each participant in OPRA would independently determine the amount of
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capacity it would obtain.
The proposed amendment to the OPRA Plan (reflected in proposed new
Section III(g) and related definitions) would require each party to the
Plan from time to time to independently project the capacity it would
need and to privately submit requests for capacity based on its
projections to an ISCA, which would maintain these individual capacity
projections and requests in confidence. The proposed definition of the
ISCA in Section II(m) of the Plan would require the ISCA to maintain
the confidentiality of this information, consistent with the provisions
of Section III(g) of the Plan.\9\ Revised Section III(g) of the Plan
would clarify that confidential capacity-related information obtained
by the ISCA would not be used by the ISCA in any of its other business
activities in a manner that may result in the information being made
available to any of the parties to the Plan, or to use it in any manner
that is otherwise inconsistent with the ISCA's obligation to hold the
information in confidence.\10\ The ISCA may share this information with
the parties only in the form of aggregate capacity requests that do not
identify the individual capacity requests of any of the parties. The
ISCA would then determine how and when to modify the OPRA System in
order to provide to each party the capacity it has requested and how
the cost of such modifications is to be allocated among the parties all
in accordance with and subject to the proposed Capacity Guidelines that
are incorporated in the Plan as part of the proposed amendment. Under
the proposed amendment, each party would be entitled to the capacity it
has requested and would be obligated to authorize and fund the
modifications of the OPRA System in accordance with the ISCA's
determinations and the specific cost allocation provisions of the
proposed Capacity Guidelines.
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\9\ See Amendment No. 2, supra note .
\10\ Id.
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The proposed Capacity Guidelines describe the function and
authority of the ISCA and its procedures in greater detail than in the
Plan itself. Under the procedures specified in the proposed Capacity
Guidelines, the ISCA would promptly review the capacity projections and
requests it receives from the parties, would discuss proposed
modifications with OPRA's Policy and Technical Committees and the OPRA
Processor, and would discuss with each party that has requested
additional capacity the ISCA's estimate of the cost to that party of
providing the capacity it requested. In every case, the ISCA would
report to OPRA concerning any modifications to the OPRA System that it
believes are called for in response to the parties' aggregate
projections and requests. In these discussions and reports, no
information from any party would be disclosed to any other party except
in the form of aggregate projections or requests. In addition, OPRA
proposes in Guideline No. 1 of the Capacity Guidelines to require the
ISCA to maintain internal safeguards and procedures adequate to assure
that the requirements of the Plan pertaining to the confidentiality of
information provided to the ISCA would be satisfied.\11\ Under the
proposed amendment to the Plan, the person designated to act as the
ISCA, before it begins to act in that capacity, would be required to
furnish a written description
[[Page 66894]]
of these internal safeguards and procedures to the Commission.\12\
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\11\ Id.
\12\ Id.
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The proposed Capacity Guidelines also provide that, in allocating
OPRA's capacity-related costs among the parties, the first $5 million
of costs in any year would be allocated as currently provided under the
OPRA Plan, based on the relative trading volume of each of the parties.
Costs above this amount would be allocated in a fair and equitable
manner as determined by the ISCA. The $5 million amount would be
subject to adjustment on an annual basis, if approved by 75% of the
parties.
A prospective new options exchange would have to inform the ISCA,
at least 6 months prior to the time it proposes to commence trading, of
the initial amount of system capacity it would need. The costs of
providing initial system capacity to an applicant in accordance with
its request, as determined by the ISCA, would be included in the
applicant's Participation Fee payable under Section 1(b) of the OPRA
Plan. Also, under Guideline No. 6 of the proposed Capacity Guidelines,
if the new party has not received the capacity it has requested at the
time it has commenced trading options, and to the extent there is any
excess capacity available in the system that has not been provided to
any of the parties, the ISCA would be able to allocate to the new party
all or a portion of any such excess capacity in order to provide the
new party with the amount of capacity determined by the ISCA to be
sufficient to satisfy the reasonable needs of the new party until it
has been provided with the capacity it initially requested.
The proposed Capacity Guidelines would permit the ISCA to provide
less than all of the capacity requested by the parties if the ISCA
determines that: (1) The capacity requests of one or more of the
parties are unreasonable, or (2) it is not reasonable to develop or
maintain a system that has capacity sufficient to satisfy the requests
of the parties.\13\ The ISCA would be authorized to allocate system
capacity among the parties under circumstances when available capacity
is insufficient to provide each party with the capacity it has
requested; however, the ISCA would not be authorized to require any
party to give up any capacity previously provided to it at the party's
request, other than in response to a major systems failure or other
catastrophe.\14\ In addition, the ISCA's authority to modify the OPRA
System and to obligate the parties to pay the costs of such
modifications would be limited as follows: (i) The ISCA could not
authorize a modification to the OPRA System that, together with other
capacity increases previously authorized by the ISCA, represents an
increase in the total capacity of the System in excess of 15,000
messages per second over the immediately preceding twelve months unless
at least 75% of the parties consent to such increase; (ii) the ISCA
could not authorize a modification to the OPRA System if the Processor
disagrees with any material aspect of the manner or scope of the
modification unless at least 75% of the parties consent to such
modification; and (iii) the ISCA could not authorize a modification to
the OPRA System that makes major changes to the System, such as
changing the types of servers used in the System or changing the
communication protocols used in the network unless at least 75% of the
parties consent to such modification.
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\13\ Guideline No. 1, Capacity Guidelines.
\14\ Guideline No. 6, Capacity Guidelines.
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As a limited exception to the allocation of System capacity in
accordance with the parties' requests and the ISCA's determinations, a
provision is made in proposed new Section III(h) of the Plan for a
party, on an anonymous basis, to offer to acquire additional capacity
from, or make excess capacity available to, another party. Furthermore,
to promote the most efficient utilization of available capacity, OPRA
proposes in Section III(g) of the Plan to provide for the continued
utilization of a ``dynamic throttle,'' so as to automatically make
available to a party with an immediate need for additional capacity, on
a short-term interruptible basis, any unused capacity that may then be
available. A party receiving additional capacity by operation of the
dynamic throttle would be required to pay for it at an above-cost rate,
so as to discourage parties from submitting unrealistically low
capacity requests in the belief that some unused capacity of other
parties would always be available to them.
Furthermore, under the proposed amendment, future Plan amendments,
including amendments to the proposed new provisions of the Plan
pertaining to capacity planning and allocation, would continue to
require the unanimous approval of the parties. However, decisions
relating to the selection or termination of the ISCA, certain changes
to the authority of the ISCA, and changes to the Capacity Guidelines
may be authorized by a vote of 75% of the parties. In addition, the
selection of the ISCA would be required to be filed with the Commission
as an amendment to OPRA's national market system plan.
In accordance with this requirement, this filing reflects OPRA's
selection of the Options Clearing Corporation (``OCC'') to act as the
ISCA upon the effectiveness of the proposed amendment to the Plan. OCC
is a registered clearing agency that, while nominally owned by the five
options exchanges, is an independent entity that is not controlled by
any exchange. Each of the five exchanges owns a 20% interest in OCC, so
that, on the basis of stock ownership alone, no exchange has a
controlling interest. However, OPRA believes that OCC's independence is
assured in ways that go beyond stock ownership. Pursuant to the bylaws
of OCC, its 16-person Board of Directors consists of one Director from
each of the five exchanges, nine representatives of OCC clearing member
firms, one Public Director, and one Management Director. The exchanges
have no voice in the selection of Member Directors, the Public
Director, or the Management Director. Thus each exchange has only a
6.25% representation on the OCC Board, and all of the exchanges
together represent only 31.25% of the Board.
OPRA believes that OCC's independence has long been recognized by
the exchanges and by the Commission. This is reflected not only in the
selection of OCC to act as the ISCA by the unanimous vote of all five
exchanges, but in OCC's other roles as the central issuer and clearing
agency for options traded on five competing exchanges, as the developer
and manager of the intermarket options linkage facility pursuant to the
Options Intermarket Linkage Plan,\15\ and as the arbiter of the
eligibility of underlying stocks for options trading pursuant to the
Options Listing Procedures Plan.\16\ OCC serves in these capacities
with the approval of all five exchanges and with the Commission's
approval, which OPRA believes stands as an acknowledgement of OCC's
independence.
\15\ Securities Exchange Act Release Nos. 43086 (July 28, 2000),
65 FR 48023 (August 4, 2000) (order approving the Linkage Plan
submitted by Amex, CBOE, and ISE); 43574 (November 16, 2000), 65 FR
70850 (November 28, 2000) (order approving PCX as participant in the
Options Intermarket Linkage Plan); and 43573 (November 16, 2000), 65
FR 70851 (November 28, 2000) (order approving Phlx as a participant
in the Options Intermarket Linkage Plan).
\16\ See Securities Exchange Act Release No. 44521 (July 6,
2001), 66 FR 36809 (July 13, 2001) (order approving a proposed
options listing procedures plan by Amex, CBOE, ISE, OCC, PCX, and
Phlx).
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The respondent exchanges must establish a system for gathering and
disseminating business information from and to participants of OPRA
such that all nonpublic information specific to a participant in OPRA
shall remain segregated and confidential from other
[[Page 66895]]
participants (except for information that may be shared in connection
with joint activities permitted as necessary to fulfill the functions
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and objectives of OPRA as stated in the Plan).
As noted in the discussion above, the proposed amendment would
require each party's individual capacity projections and requests to be
submitted to the ISCA in confidence, and the ISCA would be expressly
prohibited from sharing this information with any of the other parties,
except in the form of aggregate information that does not identify the
individual capacity requests of any of the other parties. The ISCA
would be required under Section II(m) of the Plan to maintain the
confidentiality of this information, consistent with the provisions of
Section III(g) of the Plan, which would specify that confidential
capacity-related information obtained by the ISCA would not be used by
the ISCA in any of its other business activities in a manner that may
result in the information being made available to any of the parties to
the Plan, or to use it in any manner that is otherwise inconsistent
with the ISCA's obligation to hold the information in confidence.\17\
Furthermore, Guideline No. 1 of the proposed Capacity Guidelines would
require the ISCA to maintain internal safeguards and procedures
adequate to assure that the requirements of the Plan pertaining to the
confidentiality of information provided to the ISCA would be
satisfied.\18\ A written description of these internal safeguards and
procedures would have to be furnished to the Commission before the ISCA
begins to act in that capacity.\19\
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\17\ See Amendment No. 2, supra note 5.
\18\ Id.
\19\ Id.
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In addition, OPRA proposes to amend Section III(b) of the Plan to
make explicit the requirement that each person who performs
administrative functions for OPRA, including its Executive Director and
other officials and its processor, shall agree that any nonpublic
business information pertaining to any party shall be held in
confidence and not be shared with the other parties, except for
information that may be shared in connection with permitted joint
activities. Finally, OPRA proposes to make explicit in the preamble to
the Plan that the parties themselves are each obligated to take
reasonable steps to insure that their nonpublic business information
remains segregated and confidential from the other parties, except for
information that may be shared in connection with permitted joint
activities.
The respondent exchanges must set forth a statement of OPRA's functions
and objectives as permitted under the Exchange Act, and provide for
rules and procedures that limit any joint action with respect to OPRA
by the participants in OPRA to circumstances in which such joint action
is necessary in order to fulfill the stated functions and objectives.
The functions and objectives of OPRA are specifically set forth in
the OPRA Plan as it is proposed to be amended, most particularly in the
preamble to the Plan and in Section III(b) thereof. These functions and
objectives include: (1) Determining the manner in which last sale
reports, quotation information, and other market information will be
collected, consolidated, and disseminated in satisfaction of the
requirements of the Act and establishing the formats for such
consolidated information; (2) contracting for and maintaining
facilities to support these activities, prescribing forms of contracts
to be entered into by vendors, subscribers, and other persons, and
making policy determinations pertaining to such contracts; (3)
establishing standards concerning the qualifications of different
categories of recipients of consolidated information; (4) determining
fees to be paid for access to consolidated information as permitted
under the Act; (5) determining policy questions pertaining to OPRA's
budgetary and other financial matters; (6) managing the capacity of the
OPRA System in accordance with determinations made by the ISCA as
described above; and (7) otherwise making all policy decisions
necessary in furtherance of the objectives of the Act. The proposed
amendment makes explicit in the preamble to the Plan that joint action
by the parties to the Plan is limited to those matters as to which they
share authority under the Plan, and then only to circumstances where
such joint action is necessary in order to fulfill the functions and
objectives of OPRA as stated in the Plan.
In addition to the above described amendments pertaining directly
to OPRA's capacity planning and allocation functions and conforming
definitional and editorial modifications, OPRA also proposes to amend
subsections I(a) and I(b) of the OPRA Plan to make it clear that a
party to the OPRA Plan ceases to be a party at such time as it ceases
to maintain a market for the trading of standardized options. This
aspect of the amendment is directed at the anomalous situation that
recently confronted OPRA when the New York Stock Exchange, Inc.
(``NYSE''), after it disposed of its entire options trading program and
thereby ceased to have any interest in the activities of OPRA,
nevertheless remained a party to the OPRA Plan with the same voting
rights and other rights of participation in OPRA as every other party
to the Plan.
Although the situation pertaining to the status of the NYSE as a
party to the OPRA Plan was recently resolved when the NYSE voluntarily
withdrew from OPRA, the current parties to the Plan believe it is
necessary to amend the Plan to clarify the status under the Plan of
exchanges that continue to have rules governing the trading of options
even though they no longer are involved in options trading. The parties
believe it is especially important to clarify the matter of eligibility
to be a party to the Plan in light of the other amendments to the OPRA
Plan that are proposed herein dealing with capacity planning and
capacity allocation. The parties believe that only those exchanges that
actually maintain a market for the trading of standardized options
should have a voice in these critical capacity-related issues.
The parties to the OPRA Plan believe it is consistent with Section
11A of the Act \20\ and Rule 11Aa3-2 thereunder \21\ to limit
participation in OPRA to those SROs that provide a market in the types
of securities that are covered by the OPRA Plan. OPRA believes that
subparagraph (a)(3)(B) of Section 11A \22\ authorizes the Commission,
``in furtherance of the directive in paragraph (2) of this subsection
[which includes the directive to assure the availability to brokers,
dealers and investors of information with respect to quotations for and
transactions in securities] * * * to authorize or require [SROs] 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 of more facilities
thereof.'' [Emphasis supplied.] Similarly, OPRA believes that paragraph
(b)(3) of Rule 11Aa3-2 under the Act \23\ authorizes SROs ``to act
jointly in (i) planning, developing, and operating any national market
subsystem or facility contemplated by a national market system plan * *
* or (iii) implementing or administrating an effective national market
system plan.'' OPRA believes that if an SRO does not share authority
for national market system activities in respect of a particular type
of security
[[Page 66896]]
because it does not provide a market for trading that type of security,
then there appears to be no basis in the Act for authorizing or
requiring that SRO to participate in that national market system.
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\20\ 15 U.S.C. 78k-1.
\21\ 17 CFR 240.11Aa3-2.
\22\ 15 U.S.C. 78k-1(a)(3)(B).
\23\ 17 CFR 240.11Aa3-2(b)(3).
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Finally, the proposed amendment expands the types of persons to
whom a party may disseminate proprietary information pertaining to
quotations and transactions in its market as an exception to the
requirement of the Plan that makes OPRA the exclusive channel for the
dissemination of this information. Under Section V(c)(iii) of the
current Plan, a party may disseminate its proprietary information
outside of the OPRA System to its members for display on terminals used
to enter or transmit orders or quotes to the party's market and to
other parties, provided that those members who have access to a party's
proprietary information must also have equivalent access to
consolidated information provided by OPRA, and provided further that a
party may not disseminate proprietary information outside of OPRA on
any more timely basis than the same information is provided to OPRA.
The proposed amendment to the Plan would allow a party to disseminate
its proprietary information outside of the OPRA System to any person,
provided that the requirements of the current Plan pertaining to
equivalent access to consolidated data provided by OPRA and to the
timeliness of providing data to OPRA would continue to apply. This
proposed change reflects past experience with the electronic trading
system of the ISE and the anticipated expanded use of electronic
trading systems by other parties, all of which necessarily involve the
dissemination of proprietary information over systems that are separate
from the OPRA System. OPRA has come to recognize that persons in
addition to members of a party who enter quotes or orders into a
party's electronic market may benefit from having access to the party's
electronic network. The proposed amendment is intended to facilitate
this, while at the same time assuring that all persons who have access
to a party's proprietary information would also have equivalent access
to consolidated market information provided by OPRA.
III. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the proposed Plan amendment, as modified by
Amendments No. 1 and 2, including whether the proposal and Amendments
No. 1 and 2 are consistent with the Act. Specifically, the Commission
requests comment on OPRA's proposal that the first $5 million of OPRA's
capacity-related costs in any year would be allocated based on the
relative trading volume of each of the parties, while OPRA's costs
above $5 million, as proposed in Capacity Guideline No. 7, would be
allocated by the ISCA, and, in particular, whether $5 million appears
to be an appropriate ceiling before the ISCA may begin allocating
OPRA's capacity-related costs. Furthermore, as part the of the ISCA's
limitations on authority in proposed Capacity Guideline No. 5, the ISCA
may not authorize a modification to the OPRA System that, together with
other capacity increases previously authorized by the ISCA, represents
an increase in the total capacity of the System in excess of 15,000
messages per second over the immediately preceding twelve months unless
at least 75% of the parties consent to such an increase. The Commission
seeks comment on whether such a limitation is appropriate, and, if so,
whether the 15,000 mps limitation imposed on the ISCA is reasonable,
whether OPRA should use a higher threshold, and whether commenters
recommend using a threshold percentage based on OPRA's capacity of the
previous year instead of a specified amount.
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 the
proposal and Amendments No. 1 and 2 that are filed with the Commission,
and all written communications relating to the proposal and Amendments
No. 1 and 2 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-2003-01 and should be submitted by December 19, 2003.
IV. Discussion
After careful review, the Commission finds that the proposed OPRA
Plan amendment, as amended by Amendments No. 1 and 2, is sufficient
under the Act and the rules and regulations thereunder for temporary
approval of not more than 120 days.\24\ Specifically, the Commission
believes that the proposed OPRA Plan amendment, which would revise the
manner in which OPRA engages in capacity planning and the allocation of
system capacity among the exchanges that are parties to the Plan, is
sufficient under Section 11A of the Act \25\ and Rule 11Aa3-2
thereunder \26\ for temporary approval not to exceed 120 days in 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.
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\24\ 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).
\25\ 15 U.S.C. 78k-1.
\26\ 17 CFR 240.11Aa3-2.
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Specifically, the Commission believes that OPRA's proposal to
require each party to the Plan to independently project the capacity it
would need and to confidentially submit requests for capacity based on
such projections to the ISCA is designed to eliminate joint action by
the OPRA participants in determining the amount of total capacity
procured and the allocation of such capacity. The Commission notes that
the proposal would require that the ISCA maintain these individual
capacity projections and requests in confidence, and not use such
confidential, capacity-related information in any of its business
activities that may result in the information being made available to
any of the parties of the Plan, or to use such information in any
manner that is inconsistent with its obligation to hold the information
in confidence. Furthermore, the proposed Capacity Guidelines would
require the ISCA to provide the Commission with a written description
of its internal safeguards and procedures to ensure compliance with the
Plan's confidentiality requirements prior to the time the ISCA first
exercises its authority under the Plan. The Commission believes that
these requirements provide additional assurance that each exchange's
non-public business information would remain segregated would not be
made available to its competitors. Furthermore, the Commission
emphasizes that neither the Plan nor the Capacity Guidelines should be
construed in any manner that would permit individual exchange capacity
projections or requests or other confidential, capacity-related
information to be shared with the other parties to the Plan.
[[Page 66897]]
The Commission also believes that the proposed grant to the ISCA of
the responsibility to allocate capacity-related costs above a $5
million ceiling would allow the exchanges to avoid the difficult task
of having to differentiate the costs and expenses attributable to
capacity expansion from the costs and expenses attributable to
maintaining and operating the OPRA system. However, as discussed above,
the Commission specifically requests comment on whether $5 million
would be an appropriate limit before the ISCA may begin allocating the
capacity-related costs among the parties.
The Capacity Guidelines provide that the ISCA is ordinarily
expected to provide the parties with the systems capacity they have
requested. However, the ISCA has some discretion to provide less than
all the capacity requested if it determines that the capacity requests
of one or more of the parties are unreasonable. A party's request may
be found by the ISCA to be unreasonable if it concludes that a party
does not have a reasonable need for all the capacity it has requested
within the timeframe to which the request applies.
In 1999, the Commission ordered the exchanges to discuss the
feasibility of strategies to avoid quote traffic congestion, including
quote mitigation strategies.\27\ In that Order the Commission
recognized that increases in quote message traffic have implications
not only for the options exchanges, but all users of options market
data. Moreover, the increase in quote message traffic has accelerated
since the Commission issued that order. As of September 2003, the
exchanges' peak dissemination of messages per second was 15,000
messages per second. As the options exchanges modify their trading
rules to permit competing market makers to independently quote, it is
anticipated that each exchange's demands on capacity will increase
substantially. In addition, the Boston Stock Exchange (``BSE'') has
proposed to operate a fully electronic options exchange, which would,
if approved by the Commission, place further demands on capacity. For
these reasons, the Commission believes that the ISCA may consider
whether a party has made reasonable efforts to mitigate the amount of
systems capacity that its market data requires of OPRA and other market
participants in determining whether a party does not have a reasonable
need for all the capacity it has requested.
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\27\ See Securities Exchange Act Release No. 41843 (September 8,
1999), 64 FR 50126 (September 15, 1999). In addition, the Commission
staff sent a letter to each of the options exchanges stating that
the exchanges should continue to work together to, among other
things, implement strategies to mitigate quote message traffic. See
letters from Annette L. Nazareth, Director, Division, Commission to
Salvatore F. Sodano, Chairman and Chief Executive Officer, Amex;
William J. Brodsky, Chairman and Chief Executive Officer, CBOE;
David Krell, President and Chief Executive Officer, ISE; Philip D.
DeFeo, Chairman and Chief Executive Officer, PCX; and Meyer S.
Frucher, Chairman and Chief Executive Officer, Phlx, dated September
13, 2000.
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The Capacity Guidelines also provide that the ISCA may provide less
than all the capacity requested if it determines that it is not
reasonable to develop or maintain a system that has capacity sufficient
to satisfy the request of the parties. In this regard, the Capacity
Guidelines provide that the ISCA may determine that it is not
reasonable to develop or maintain a system with all of the capacity
that has been requested if it concludes that it is not technically
feasible to do so, or that a significant number of OPRA vendors cannot
or will not carry the amount of message traffic disseminated by such a
system. Because of the implications that increases in message traffic
have on all users of options market data, the Commission believes it is
important that the ISCA consider the technical feasibility for all
users of options market data, including vendors, brokers-dealers, and
customers, to develop or maintain a system with all of the capacity
that has been requested.
In addition, the Commission notes that, under the proposed Capacity
Guidelines, the ISCA would not be permitted to increase systems
capacity in excess of 15,000 mps during a twelve-month period without
the approval of 75% of the parties to the Plan. The Commission believes
that some restriction on the ISCA's authority is important to prevent
large increases in systems capacity, which could have a significant
impact on down-stream users of OPRA data, such as vendors and broker-
dealers.
Furthermore, the Plan amendment would require OPRA to file its
selection of the ISCA with the Commission as an amendment to the Plan,
which would become effective upon filing.\28\ This requirement would
provide the Commission with the opportunity to review OPRA's choice of
the ISCA. Under this Plan amendment, OPRA has proposed to select OCC to
function as the ISCA. Because of OCC's status as an SRO, the Commission
will be able to monitor its obligations under the Plan to maintain the
exchanges' individual capacity projections and requests confidentially.
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\28\ Although filed effective upon filing, the Commission may,
at any time within 60 days of the filing of the amendment, summarily
abrogate the amendment and require that such amendment be refiled in
accordance with paragraph (b)(1) to Rule 11Aa3-2 under the Act and
reviewed in accordance with paragraph (c)(2) of the Rule, if it
appears to the Commission that 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 CFR
240.11Aa3-2(c)(3).
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The Commission believes that the proposed Capacity Guidelines
adequately provide for the allocation of capacity to new parties to
OPRA. Under Guideline No. 2 of the proposed Capacity Guidelines, a
prospective new options exchange would have to inform the ISCA, at
least 6 months prior to the time it proposes to commence trading, of
the initial amount of system capacity it would need. The ISCA would
then aggregate this request for capacity with the requests received
from the existing exchanges. Also, under Guideline No. 6 of the
proposed Capacity Guidelines, if the new party has not received the
capacity it has requested at the time it has commenced trading options,
and to the extent there is any excess capacity available in the system
that has not been provided to any of the parties, the ISCA would be
able to allocate to the new party all or a portion of any such excess
capacity in order to provide the new party with the amount of capacity
determined by the ISCA to be sufficient to satisfy the reasonable needs
of the new party until it has been provided with the capacity it
initially requested. These provisions in the proposed Capacity
Guidelines, which specifically contemplate new entrants and provide a
mechanism for them to acquire capacity, together with the prohibitions
imposed on the ISCA from using confidential capacity-related
information in any of its other business activities that may result in
the information being made available to any of the parties to the Plan
or in any manner inconsistent with the ISCA's obligations to hold such
information in confidence, are designed to ensure that the existing
exchanges would not be able to restrain new entrants from joining OPRA
and acquiring the capacity that they require.
Finally, the Commission finds that it is appropriate to put the
proposed OPRA Plan amendment, as modified by Amendments No. 1 and 2,
into effect summarily upon publication of notice on a temporary basis
not to exceed 120 days to permit OPRA to implement the capacity
planning process at the soonest practicable time. Since September 2000,
when the respondent exchanges entered into the Settlement Order with
the
[[Page 66898]]
Commission \29\ and simultaneously, consented to the entry of a Final
Judgment with the Department of Justice,\30\ the options exchanges have
interpreted those actions to preclude them from engaging in joint
capacity planning under the current OPRA Plan. Since that time, the
exchanges' peak dissemination of OPRA data has increased from
approximately 3,500 messages per second to more than 15,000 messages
per second, as of September 30, 2003. As the existing options exchanges
modify their trading rules to permit competing market makers to
independently quote, it is anticipated that each exchange's demands on
capacity will increase substantially. In addition, the BSE has proposed
to operate a fully electronic options exchange, which would, if
approved by the Commission, place further demands on capacity.
Accordingly, to permit the exchanges to commence capacity planning
without the need for joint action, as required by the Settlement Order,
the Commission believes it 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 to approve the proposed amendment to the
OPRA Plan on a temporary basis not to exceed 120 days so that options
market data can continue to be disseminated on a timely basis.\31\
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\29\ See Order, supra note 7.
\30\ United States v. American Stock Exchange, LLC et al.
(December 6, 2000), Civ. No. 00-CV-02174 (EGS).
\31\ 17 CFR 240.11Aa3-2(c)(4).
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V. Conclusion
It Is Therefore Ordered, pursuant to Section 11A of the Act,\32\
and Rule 11Aa3-2(c)(4) thereunder,\33\ that the proposed OPRA Plan
amendment, as modified by Amendments No. 1 and 2, (SR-OPRA-2003-01) is
approved on a temporary basis not to exceed 120 days.
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\32\ 15 U.S.C. 78k-1.
\33\ 17 CFR 240.11Aa3-2(c)(4).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\34\
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\34\ 17 CFR 200.30-3(a)(29).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-29658 Filed 11-26-03; 8:45 am]
BILLING CODE 8010-01-P