I'm writing you this e-mail to explain what is happening in the Option market. Back on May 4, 2000, the SEC

came out with a special study, "Report Concerning Display of Customer Limit Orders". In the report it stated:

The Staff's recent inspections of the options exchanges revealed several instances in which the design of the automated execution and automated order routing systems may serve to disadvantage some customer limit orders. The Staff found that three options exchanges' automated execution systems are programmed to route most incoming orders that are eligible for execution against an order on the limit order book, including marketable limit orders, to manual handling instead of routing them for automatic execution against the order in the limit order book.

Nine months later and still these three Exchanges (AMEX, PHLX and CBOE) have failed to allow appropriate access to their customer order books. As far as I understand these three Exchanges will be forced to allow this access no later than April 1, 2001 as a result of the "Firm Quote" rule.

I have also noticed that the PSE is no longer allowing direct access to their markets when their market is locked with another market. Currently this market turns off their auto execution system when the locked bid/ask is a customer bid/ask or a specialist bid/ask

The bottom line is that the access in the today's Option market is as bad as it has been since the advent of multiple listing.

In November 2000, the SEC added the "FIRM QUOTE" rule to the options market.

"The quote rule requires responsible brokers and dealers to IMMEDIATELY execute an
order to buy or sell listed options in an amount equal to or less than it's firm quote size" (Exchange Act Rule 11Ac1-1(c)(2), 17 CFR 240.11Ac1-1(c)(2).)

The fact that the PSE has stopped honoring markets implies to me that the "FIRM QUOTE" rule does not apply to "locked markets".

As a result I see the potential for less access on many markets potentially making the overall Option Market worse than it was prior to the new rule. Prior to the "Firm Quote" rule each Option Exchange would honor their quotes differently. The following table illustrates this:

TABLE 1

Exchange	Crossed Markets	Locked Markets	Non Locked markets	Access to Client Orders
ISE	YES	YES	YES	YES
PSE	NO	YES	YES	YES
CBOE	NO	YES	YES	FEW
PHLX	NO	NO	YES	NO
AMEX	NO	NO	YES	NO

THE PSE

The PSE may no longer honor quotes that are locked. As I stated earlier they have recently stopped honoring "locked markets" with auto executions. The access on the PSE as a result could become worse. (I'm not sure if it is related to the FIRM QUOTE rule) It doesn't matter whether the order that locks the market is a customer order or is a market maker order. They can turn off their auto execution system when the market is locked similar to the AMEX and PHLX.

THE ISE

The ISE could easily change their rules so they are similar to the PSE's . They could easily turn off their auto executions by going into their manual mode when their posted quote is locked or crossed. Although they have not stated that they would do this, the precedent set by the PSE could easily make their market worse than it was prior to the "FIRM QUOTE" Rule. At best it would be the same as the ISE tends to honor all their markets.

THE CBOE

The CBOE could also turn their RAES system off when their markets become locked similar to the PSE. This would also be a negative change for investors. The only benefit here would be that Automated Book Priority (ABP) would be floor wide and all customers would have direct access to customer orders already posted in the marketplace. Currently not all equities options have this direct access.

THE PHLX AND THE AMEX

The PHLX and AMEX markets would both become better as there would be direct access to any of the client orders already posted in the order book. They currently don't allow ANY access (via an auto execution) to markets that are locked or crossed.

The following could possibly become the standard in terms of access for each Exchange:

TABLE 2

EXCHANGE	Crossed Markets	Locked Markets	Non Locked markets	Access to Client Orders
Standard EXCHANGE	NO	NO	YES	YES

The question one has to ask is; what is better for the customer (Table 1or Table 2)?

The SEC seems to think that the "firm quote" rules will be much better for investors as you state:

The Commission believes that the amendments will provide significant and immediate benefits to investors. In particular, market participants, including customers and broker-dealers, will be able to rely on quotes up to their published size in routing orders that are not eligible for execution in the automatic execution systems." 

However if you allow the Exchanges to back away from locked markets by allowing them to turn off their auto execution systems then many markets could abuse this by simply locking many of their active markets so they can constantly get a manual look at any incoming orders. Currently the most frustrating market is a market that is locked by two Exchanges that don't provide access (AMEX and PHLX) when locked. Many times the market in question can stay locked for extended periods of time forcing all orders whether buy or sell orders to be handled manually.

In a recent linkage proposal it was stated that:

(C) Locked and Crossed Markets. The Participants agree that the dissemination of "locked" or "crossed" markets shall be avoided. The Participants agree to approve and submit to the SEC for its consideration uniform rules providing that: (1) if an Eligible Market Maker should lock or cross a market, that Eligible Market Maker will unlock, uncross or direct a Principal Order through the Linkage to trade against the bid or offer that was locked or crossed; and (2) if a member other than an Eligible Market Maker should lock or cross a market, that member will unlock or uncross the market.

I don't believe that these "Principal Trades" should be the only ones allowed to trade against locked markets. Everyone should be allowed to have direct access (via an auto execution when below the firm quote size) when the market is locked. I also find it funny to read that these markets should be "avoided". The word itself is anti competitive. The most competitive markets are markets that have a very small spread or ones that have no spread (locked markets). As long as we have several different market centers then you have to expect locked markets, markets that can be locked for several minutes at a time with no trade taking place. Currently Equities are often locked. Traders have access to these quotes via ECN's and SOES. Instinet may not display the locked market but customers certainly have access to it. The fact is, the Option Exchanges can't guarantee that the market won't be locked so they should be forced to honor the "FIRM Quote" rule in such cases.

In terms of crossed markets I can understand why the Exchanges want their auto executions system turned off (although the ISE seems determined to honor crossed quotes). However to avoid any abuse then I think some sort of rule should force the participants to UNCROSS the market quickly. That is once a market becomes crossed then auto executions can be turned off for a specific time (say one minute). Once this time expires then all quotes are open for trade via their auto execution systems whether the market is crossed or not.

I believe that the integrity of the Options market will only be protected if you force all their quotes to be firm (including crossed markets with specific rules).

Mike Ianni