Joint Industry Plan; Order Approving the National Market System Plan Relating to Options Order Protection and Locked/Crossed Markets Submitted by the Chicago Board Options Exchange, Incorporated, International Securities Exchange, LLC, The NASDAQ Stock Market LLC, NASDAQ OMX BX, Inc., NASDAQ OMX PHLX, Inc., NYSE Amex LLC, and NYSE Arca, Inc., 39362-39371 [E9-18763]
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39362
Federal Register / Vol. 74, No. 150 / Thursday, August 6, 2009 / Notices
both NYSE and FINRA or NYSE Amex
and FINRA. Accordingly, the Plan
promotes efficiency by reducing costs to
Common Members. Furthermore,
because FINRA, NYSE, and NYSE Amex
will coordinate their regulatory
functions in accordance with the Plan,
the Plan should promote investor
protection and the public interest.
In particular, the Commission notes
that, under the proposed Plan, FINRA,
NYSE, and NYSE Amex have allocated
regulatory responsibility for Common
Rules to the extent that such
responsibilities involve member firm
regulation. The Plan also sets forth those
areas for which NYSE and NYSE Amex
will retain regulatory responsibility,
including: examinations of conduct or
actions by a Common Member covered
by NYSE-only or NYSE Amex-only rules
and/or by related Federal laws or
regulations; surveillance, investigation,
and enforcement with respect to
conduct or action relating to trading on
or through the systems and facilities of
NYSE or NYSE Amex and conduct
otherwise covered by NYSE-only or
NYSE Amex-only rules, as well as
whether such conduct may constitute a
violation of Federal laws or regulations;
processing of applications for trading
licenses or other membership in NYSE
or NYSE Amex; and qualification and
registration of member firm personnel to
effect transactions or work on the floor
of NYSE or NYSE Amex pursuant to
such SRO’s rules.27
In addition, the proposed Plan
provides that NYSE and NYSE Amex
will retain regulatory responsibility for
the application of any Common Rule as
it pertains to matters other than member
firm regulation, including matters
relating to such SRO’s retained
responsibilities as set forth in the Plan
(the ‘‘Non-Exclusive Common Rules’’).
The Non-Exclusive Common Rules are
specifically annotated in the List of
Common Rules and include those rules
for which FINRA, NYSE, and NYSE
Amex will each bear their respective
regulatory responsibilities, consistent
with the scope of the 17d–2 Plan. Such
rules are ‘‘non-exclusive’’ in the sense
that they may relate to member firm
regulation (for which FINRA would
assume regulatory responsibility) as
well as matters other than member firm
regulation (for which NYSE or NYSE
Amex would retain regulatory
responsibility). Accordingly, NYSE and
NYSE Amex will each bear
responsibility for the application of
their Non-Exclusive Common Rules
27 See paragraphs 2(d)(i)–(iv) and (e)(i)–(iv) of the
proposed 17d–2 Plan.
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concerning their particular regulatory
responsibilities.
According to the Plan, whenever any
Party seeks to make a change to any of
its rules that are Common Rules, before
filing a proposed rule change with the
Commission, it will inform the other
Parties of the intended change to
determine whether the other Parties will
propose a conforming change to its
version of the Common Rule. If the
Parties do not agree to propose
conforming changes, the Parties agree to
file with the Commission an
amendment to the 17d–2 Plan to delete
such rule from the list of Common
Rules.28 Finally, the proposed Plan
requires the Parties annually (or more
frequently if required by changes in the
rules of a Party) to confirm in writing
the accuracy of the list of Common
Rules.29 This provision ensures that the
Parties keep the Common Rules up-to`
date vis-a-vis the other Parties and
should facilitate the ability of the Parties
to accurately administer their
responsibilities under the proposed Plan
consistent with the scope of the Plan
declared effective by the Commission
herein.
The proposed Plan also requires the
Parties to share information on a
number of matters, including, for
example, financial and operational
matters of Common Members, thirdparty complaints, and disciplinary
actions.30 The Commission believes that
the information-sharing provisions
contained in the proposed Plan fosters
cooperation and coordination among the
Parties, thereby promoting investor
protection and removing impediments
to the development of a national market
system.
Finally, the Plan permits any Party to
terminate the Plan at any time, subject
to 180 days written notice to the other
Parties and subject to Commission
approval.31
V. Conclusion
This Order gives effect to the Plan
filed with the Commission in File No.
4–587. The Parties shall notify all
members affected by the Plan of their
rights and obligations under the Plan.
It is therefore ordered, pursuant to
Section 17(d) of the Act,32 that the Plan,
made by and among NYSE, NYSE
Regulation, NYSE Amex, and FINRA,
that is contained in File No. 4–587 and
28 See
paragraph 2(a) of the proposed 17d–2 Plan.
paragraph 2(c) of the proposed 17d–2 Plan.
30 See paragraph 5 of the proposed 17d–2 Plan.
31 See paragraph 14 of the proposed 17d–2 Plan.
The Commission notes that, as reflected in
paragraph 14, Commission approval is required for
any Party to terminate its participation in the Plan.
32 15 U.S.C. 78q(d).
29 See
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filed pursuant to Rule 17d–2, is hereby
approved and declared effective.
It is therefore ordered that NYSE and
NYSE Amex are relieved of those
responsibilities allocated to FINRA
under the Plan in File No. 4–587.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.33
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9–18762 Filed 8–5–09; 8:45 am]
BILLING CODE 8010–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–60405; File No. 4–546]
Joint Industry Plan; Order Approving
the National Market System Plan
Relating to Options Order Protection
and Locked/Crossed Markets
Submitted by the Chicago Board
Options Exchange, Incorporated,
International Securities Exchange,
LLC, The NASDAQ Stock Market LLC,
NASDAQ OMX BX, Inc., NASDAQ OMX
PHLX, Inc., NYSE Amex LLC, and
NYSE Arca, Inc.
July 30, 2009.
I. Introduction
The proposed Options Order
Protection and Locked/Crossed Market
Plan (‘‘Proposed Plan’’) was filed
jointly, pursuant to Rule 608 of
Regulation NMS under the Securities
Exchange Act of 1934 (‘‘Act’’)
(‘‘Regulation NMS’’) (‘‘Rule 608’’),1 by
the International Securities Exchange,
LLC (‘‘ISE’’) and NYSE Arca, Inc.
(‘‘NYSE Arca’’) on September 13, 2007
and September 18, 2007, respectively,
with the Securities and Exchange
Commission (‘‘Commission’’).2 On
December 11, 2007, ISE and NYSE Arca
separately filed Amendment No. 1 to the
Proposed Plan.3 On April 24, 2008, and
April 17, 2008, ISE and NYSE Arca,
respectively, filed Amendment No. 2 to
the Proposed Plan.4 On November 10,
33 17
CFR 200.30–3(a)(34).
CFR 242.608.
2 See letter from Michael J. Simon, General
Counsel, ISE, to Nancy M. Morris, Secretary,
Commission, dated September 12, 2007 (‘‘ISE Letter
1’’); and letter from Peter G. Armstrong, Managing
Director, Options, NYSE Arca, to Nancy M. Morris,
Secretary, Commission, dated September 14, 2007
(‘‘NYSE Arca Letter 1’’).
3 See letter from Michael J. Simon, General
Counsel, ISE, to Nancy M. Morris, Secretary,
Commission, dated December 10, 2007; and letter
from Peter G. Armstrong, Managing Director,
Options, NYSE Arca, to Nancy M. Morris, Secretary,
Commission, dated December 10, 2007.
4 Amendment No. 2 superseded Amendment No.
1 and replaced it in its entirety. See letter from
1 17
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2008 and October 31, 2008, ISE and
NYSE Arca, respectively, filed
Amendment No. 3 to the Proposed
Plan.5 On April 30, 2008, May 8, 2008,
June 18, 2008, June 18, 2008, and July
9, 2008, respectively, Chicago Board
Options Exchange, Incorporated
(‘‘CBOE’’), The NASDAQ Stock Market
LLC (‘‘Nasdaq’’), American Stock
Exchange LLC (‘‘Amex’’) (f/k/a NYSE
Alternext US LLC, ‘‘NYSE Alternext,’’
n/k/a NYSE Amex LLC, ‘‘NYSE Amex’’),
Philadelphia Stock Exchange,
Incorporated (n/k/a NASDAQ OMX
PHLX, Inc., ‘‘Phlx’’), and Boston Stock
Exchange, Inc. (‘‘BSE’’) (n/k/a NASDAQ
OMX BX, Inc., ‘‘BX’’ and together with
ISE, NYSE Arca, CBOE, Nasdaq, Amex,
and Phlx, the ‘‘Proposing Exchanges’’)
filed with the Commission the Proposed
Plan.6 On November 25, 2008,
November 26, 2008, December 2, 2008,
December 4, 2008, and December 5,
2008, CBOE, NYSE Alternext, BSE,
Phlx, and Nasdaq, respectively, filed
Amendment No. 1 to the Proposed
Plan.7 On April 2, 2009, a detailed
Michael J. Simon, General Counsel, ISE, to Nancy
M. Morris, Secretary, Commission, dated April 16,
2008; and letter from Peter G. Armstrong, Managing
Director, Options, NYSE Arca, to Nancy M. Morris,
Secretary, Commission, dated April 16, 2008.
5 See letter from Michael J. Simon, General
Counsel, ISE, to Florence Harmon, Acting Secretary,
Commission, dated November 7, 2008 (‘‘ISE Letter
2’’); and letter from Peter G. Armstrong, Managing
Director, Options, NYSE Arca, to Florence Harmon,
Acting Secretary, Commission, dated October 30,
2008 (‘‘NYSE Arca Letter 2’’).
6 In their respective filings of the Proposed Plan,
Amex, BSE, CBOE, Nasdaq, and Phlx incorporated
the changes made by ISE and NYSE Arca in
Amendment No. 2. See letters from Jeffrey P. Burns,
Vice President and Associate General Counsel,
Amex, to Nancy M. Morris, Secretary, Commission,
dated June 17, 2008 (‘‘Amex Letter 1’’); Bruce
Goodhue, Chief Regulatory Officer, BSE, to Florence
Harmon, Acting Secretary, Commission, dated July
8, 2008 (‘‘BSE Letter 1’’); Edward J. Joyce, President
and Chief Operating Officer, CBOE, to Nancy M.
Morris, Secretary, Commission, dated April 29,
2008 (‘‘CBOE Letter 1’’); Jeffrey S. Davis, Vice
President and Deputy General Counsel, The
NASDAQ OMX Group, Inc., to Nancy M. Morris,
Secretary, Commission, dated May 7, 2008
(‘‘Nasdaq Letter 1’’); and Richard S. Rudolph, Vice
President and Counsel, Phlx, to Nancy M. Morris,
Secretary, Commission, dated June 17, 2008 (‘‘Phlx
Letter 1’’).
7 In their respective Amendment No. 1 to the
Proposed Plan, BSE, CBOE, NYSE Alternext, Phlx,
and Nasdaq made changes identical to those made
by ISE and NYSE Arca in Amendment No. 3. See
letters from Edward J. Joyce, President and Chief
Operating Officer, CBOE, to Florence Harmon,
Acting Secretary, Commission, dated November 25,
2008 (‘‘CBOE Letter 2’’); Jeffrey P. Burns, Managing
Director, NYSE Alternext, to Florence Harmon,
Acting Secretary, Commission, dated November 25,
2008 (‘‘Amex Letter 2’’); John Katovich, Vice
President, BSE, to Florence Harmon, Acting
Secretary, Commission, dated December 1, 2008
(‘‘BSE Letter 2’’); Richard S. Rudolph, Vice
President and Counsel, Phlx, to Florence Harmon,
Acting Secretary, Commission, dated December 3,
2008 (‘‘Phlx Letter 2’’); and Jeffrey S. Davis, Vice
President and Deputy General Counsel, The
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summary of the Proposed Plan was
published for comment in the Federal
Register.8
The Commission received one
comment on the Proposed Plan.9
This order approves the Proposed
Plan, with changes as the Commission
deems necessary or appropriate, thus
authorizing CBOE, ISE, Nasdaq, BX,
Phlx, Amex, and NYSE Arca to act
jointly to implement the Proposed Plan,
as modified herein, as a means of
facilitating a national market system in
accordance with the requirements of
Section 11A of the Act.10
39363
a finding that the proposed plan 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 mechanism of, a national
market system, or otherwise in
furtherance of the purposes of the
Act.’’ 14
B. Current Plan
Currently, the Proposing Exchanges
are signatories to the Plan for the
Purpose of Creating and Operating an
Intermarket Option Linkage (‘‘Current
II. Background
Plan’’). The Current Plan is a national
A. Section 11A of the Act
market system plan linking its
participants. The Commission approved
In 1975, Congress directed the
the Current Plan on July 28, 2000.15
Commission, through the enactment of
Section 11A of the Act,11 to facilitate the Subsequently, both Pacific Exchange,
Inc. (n/k/a ‘‘NYSE Arca’’) and Phlx
establishment of a national market
submitted proposed amendments to the
system to link together the individual
Current Plan to become participants to
markets that trade securities. Congress
the Current Plan. These proposed
found the development of a national
amendments were approved on
market system to be in the public
November 16, 2000.16 On February 5,
interest and appropriate for the
protection of investors and the
2004, BSE’s proposed amendment to
maintenance of fair and orderly markets become a participant to the Current Plan
to assure fair competition among the
became effective.17 Further, Nasdaq’s
exchange markets.12 Section
proposed amendment to become a
11A(a)(3)(B) of the Act directs the
participant to the Current Plan became
Commission, ‘‘by rule or order, to
effective on March 21, 2008.18
authorize or require self-regulatory
The Current Plan requires its
organizations to act jointly with respect
participants to avoid, absent reasonable
to matters as to which they share
justification and during normal market
authority under this title in planning,
conditions, trading at a price inferior to
developing, operating, or regulating a
that displayed on another market
national market system (or a subsystem
19
thereof) or one or more facilities.’’ 13 The (‘‘trade-through’’). The Current Plan
provides for several exceptions to tradeCommission’s approval of a national
market system plan is conditioned upon through liability, including, among
other things, systems malfunction,
failure of the receiving market to
NASDAQ OMX Group, Inc., to Florence Harmon,
Acting Secretary, Commission, dated December 4,
respond to an incoming order within 30
2008 (‘‘Nasdaq Letter 2’’).
seconds, failure of the market traded
8 Securities Exchange Act Release No. 59647
through to complain within the
(March 30, 2009), 74 FR 15010 (File No. 4–546)
specified time period, complex trades,
(‘‘Proposed Plan Notice’’). The full text of the
Proposed Plan submitted by the Proposing
trading rotations, and non-firm
Exchanges, is available on the Commission’s Web
quotations on the market that was
site at https://sec.gov/rules/sro/nms/nmsarchive/
traded through.20 The Current Plan also
nms2007.shtml#4-546, at each Proposing Exchange,
provides a mechanism by which a
and at the Commission’s Public Reference Room.
9 Letter from John C. Nagel, Managing Director &
member of a participating exchange
Deputy General Counsel, Citadel Investment Group
L.L.C. (‘‘Citadel’’) to Nancy M. Morris, Secretary,
Commission, dated July 18, 2008 (‘‘Citadel Letter’’).
The Citadel Letter cited to Citadel’s comments
made in a letter from John C. Nagel, Managing
Director & Deputy General Counsel, Citadel to
Nancy M. Morris, Secretary, Commission, dated
July 15, 2008 (Petition for Rulemaking to Address
Excessive Access Fees in the Options Markets)
(‘‘Petition for Rulemaking’’).
10 15 U.S.C. 78k–1. See also 17 CFR 242.608(b)(2).
The approved Options Order Protection and
Locked/Crossed Market Plan, which incorporates
the changes the Commissions deems necessary or
appropriate, is attached here as Appendix A and is
referred to herein as the ‘‘Options Linkage Plan.’’
11 15 U.S.C. 78k–1.
12 15 U.S.C. 78k–1(a)(1)(C).
13 15 U.S.C. 78k–1(a)(3)(B).
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14 17
CFR 242.608(b)(2).
Securities Exchange Act Release No. 43086
(July 28, 2000), 65 FR 48023 (August 4, 2000) (File
No. 4–429).
16 See Securities Exchange Act Release Nos.
43573 (November 16, 2000), 65 FR 70851
(November 28, 2000) (File No. 4–429) and 43574
(November 16, 2000), 65 FR 70850 (November 28,
2000) (File No. 4–429).
17 See Securities Exchange Act Release No. 49198
(February 5, 2004), 69 FR 7029 (February 12, 2004)
(File No. 4–429).
18 See Securities Exchange Act Release No. 57545
(March 21, 2008), 73 FR 16394 (March 27, 2008)
(File No. 4–429).
19 Section 8(c) of the Current Plan.
20 Section 8(c)(iii) of the Current Plan.
15 See
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could seek satisfaction if a customer
order is traded through.21
Under the Current Plan, its
participants agree that the
dissemination of ‘‘locked’’ or ‘‘crossed’’
markets should be avoided, and, if their
members lock or cross a market, they
should take remedial actions to unlock
or uncross such market.22 Further, the
Current Plan contains provisions to
address trade comparison, clearing,
trading halts, non-firm quotations, and
administration of the Current Plan.23
Except with respect to the addition of
new participants and the withdrawal of
current participants, any proposed
change to the Current Plan must be
approved unanimously by its
participants.24
The participating exchanges comply
with the requirements of the Current
Plan, including the prohibition against
trade-throughs, by utilizing a stand
alone system (‘‘Linkage Hub’’) to send
and receive specific order types. The
Linkage Hub is a centralized data
communications network that
electronically links the options
exchanges to one another. The Options
Clearing Corporation (‘‘OCC’’) operates
the Linkage Hub.25
There are three defined order types
under the Current Plan that its
participants could route through the
Linkage Hub to limit trade-throughs:
orders represented by eligible market
makers on behalf of customers
(‘‘Principal Acting as Agent Orders’’ or
‘‘P/A Orders’’); 26 orders for the
principal accounts of market makers
and specialists (‘‘Principal Orders’’); 27
and orders intended to satisfy tradethrough liabilities (‘‘Satisfaction
Orders’’).28 Non-market-maker brokerdealers do not have access to the
Linkage Hub.
C. Proposed Plan
The Proposing Exchanges are now
seeking approval of an alternative
linkage plan, the Proposed Plan. As
described in more detail below, the
Proposed Plan would not require a
central linkage mechanism akin to the
Current Plan’s Linkage Hub, and would
introduce certain new features to
8(c)(ii) of the Current Plan.
7(a)(i)(C) of the Current Plan.
23 Sections 5, 9, and 10 of the Current Plan.
24 Section 5(c)(i) of the Current Plan.
25 See ISE Letter 2 and NYSE Arca Letter 2, supra
note 5; see also Amex Letter 2, BSE Letter 2, CBOE
Letter 2, Nasdaq Letter 2, and Phlx Letter 2, supra
note 7.
26 Sections 2(16)(a) and 7(a)(ii)(A), (B) of the
Current Plan.
27 Sections 2(16)(b) and 7(a)(ii)(C) of the Current
Plan.
28 Sections 2(16)(c) and 7(a)(ii)(D) of the Current
Plan.
linkages between options markets,
including an Intermarket Sweep Order
(‘‘ISO’’) similar to that available for
NMS stocks under Regulation NMS.29
III. Discussion
As discussed above, in 1975, Congress
directed the Commission, through the
enactment of Section 11A of the Act,30
to facilitate the development of a
national market system consistent with
the objectives of the Act. In particular,
Section 11A(a)(3)(B) of the Act 31
authorizes the Commission ‘‘by rule or
order, to authorize or require selfregulatory 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.’’ Rule 608 establishes the
procedures for filing, amending, and
approving a national market system
plan. Approval of such a plan is
conditioned upon a finding that the
proposed plan ‘‘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.’’ 32
After careful review, the Commission
has determined to approve the Proposed
Plan, pursuant to Section 11A(a)(3)(B) of
the Act 33 and Rule 608 thereunder,34
with changes set forth herein as the
Commission has deemed necessary and
appropriate.35 Specifically, the
Commission finds that changes to the
Proposed Plan set forth herein are
necessary and appropriate in the public
interest. The Commission further finds
that the Options Linkage Plan is in
furtherance of the purposes of the Act
in that it requires the protection of the
best priced displayed quotes and
avoidance and reconciliation of locked
and crossed markets, and thus is
necessary and appropriate in the public
interest, for the protection of investors
and the maintenance of fair and orderly
markets, to remove impediments to, and
21 Section
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22 Section
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29 See Securities Exchange Act Release No. 51808
(June 9, 2005), 70 FR 37496 (June 29, 2005) (File
No. S7–10–04) (‘‘NMS Release’’); 17 CFR 242.600 et
seq.
30 15 U.S.C. 78k–1.
31 15 U.S.C. 78k–1(a)(3)(B).
32 17 CFR 242.608.
33 15 U.S.C. 78k–1(a)(3)(B).
34 17 CFR 242.608.
35 The Commission has modified the Proposed
Plan to amend Section 7 of the Proposed Plan
relating to the implementation date of the plan (see
infra notes 140–143 and accompanying text).
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perfect the mechanisms of, a national
market system.36
The Commission believes that
Proposed Plan’s decentralized structure
will allow the Proposing Exchanges to
take advantage of new technology that
allow for efficient routing and
executions. The Proposed Plan will give
the Proposing Exchanges greater
flexibility for order handling as it would
allow the exchanges to utilize private
linkages, instead of requiring each
Proposing Exchange to connect to, and
participate in the maintenance of, a
centralized hub. In addition, the
Proposed Plan would permit the use of
ISOs in the options markets. As such,
the Proposed Plan would allow the
Proposing Exchanges to move towards
the market structure approved by the
Commission for NMS stocks under
Regulation NMS.37 The Commission
believes that the Options Linkage Plan
will allow the Proposing Exchanges to
update the way in which they
accomplish effective quote protection
and locked and crossed market
reconciliation. For the reasons described
above, the Commission believes that
these provisions of the Options Linkage
Plan will provide benefits to the options
markets, including the Proposing
Exchanges and market participants
generally.
In its comment letter on the Proposed
Plan, Citadel referenced the comments it
made with regard to access fees in the
options markets in its Petition for
Rulemaking.38 There, Citadel
encouraged the Commission to institute
a rulemaking proceeding to limit the
fees that options exchanges may charge
non-members to obtain access to
quotations.39 Commission staff is
currently considering Citadel’s petition.
A. Order Protection
1. Requirement of Reasonable Policies
and Procedures
The Options Linkage Plan requires
each Participant 40 to establish,
36 17
CFR 242.608(b)(2).
supra note 29.
38 See Citadel Letter, supra note 9.
39 See Petition for Rulemaking, supra note 9.
40 The Options Linkage Plan defines
‘‘Participant’’ to mean an Eligible Exchange whose
participation in the plan has become effective
pursuant to Section 3(c) of the Options Linkage
Plan. See Section 2(15) of the Options Linkage Plan.
The Options Linkage Plan defines ‘‘Eligible
Exchange’’ to mean a national securities exchange
registered with the Commission in accordance with
Section 6(a) of the Act that, among other things, is
a Participant Exchange in OCC (as that term is
defined in Section VII of the OCC by-laws) and is
a party to the OPRA Plan (as that term is described
in Section I of the OPRA Plan). ‘‘OPRA Plan’’ means
the plan filed by the Options Price Reporting
Authority with the Commission pursuant to Section
11A(a)(1)(C)(iii) of the Act and approved by the
37 See
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maintain, and enforce written policies
and procedures as approved by the
Commission that are reasonably
designed to prevent Trade-Throughs in
that Participant’s market in Eligible
Options Classes.41 A ‘‘TradeThrough’’ 42 is defined as a transaction
in an option series, either as principal
or agent, at a price that is lower than a
Protected Bid or higher than a Protected
Offer. A ‘‘Protected Bid’’ or a ‘‘Protected
Offer’’ 43 means a bid or offer in an
option series that is displayed by an
Eligible Exchange, is disseminated
pursuant to the OPRA Plan, and is the
Best Bid or Best Offer of an Eligible
Exchange. A ‘‘Best Bid’’ or ‘‘Best
Offer’’ 44 means the highest bid price or
the lowest offer price communicated by
a member of an Eligible Exchange to any
broker-dealer or to any customer at
which such member is willing to buy or
sell, either as principal or agent.
The Options Linkage Plan also
requires each Participant to agree to
conduct surveillance of its market on a
regular basis to ascertain the
effectiveness of the policies and
procedures to prevent Trade-Throughs
and to take prompt action to remedy
deficiencies in such policies and
procedures.45
As is the case currently for NMS
stocks under Regulation NMS,46 the
Commission believes the Options
Linkage Plan’s policies and proceduresbased approach to preventing TradeThroughs in options is in the public
interest, appropriate for the protection
of investors and the maintenance of fair
and orderly markets, and is consistent
with Section 11A(a)(1)(C) of the Act.47
The requirement in Section 5(a)(i) of the
Options Linkage Plan is virtually
identical to the requirement in Rule
611(a) of Regulation NMS. The
Commission expects the Participants in
the Options Linkage Plan will establish,
maintain, and enforce written policies
and procedures comparable to those
established, maintained and enforced by
the market centers subject to Rule
Commission and declared effective as of January 22,
1976, as from time to time amended. See Section
2(14) of the Options Linkage Plan. For the
definitions of ‘‘Trade-Through,’’ ‘‘Best Bid’’ or ‘‘Best
Offer,’’ ‘‘Locked Market,’’ and ‘‘Crossed Market,’’
see infra notes 42, 44, and 119 and accompanying
texts.
41 Section 5(a)(i) of the Options Linkage Plan.
42 Section 2(21) of the Options Linkage Plan.
43 Section 2(17) of the Options Linkage Plan.
Protected Bid and Protected Offer, together are
referred to herein as ‘‘Protected Quotation.’’ See
Section 2(18) of the Options Linkage Plan.
44 Sections 2(1) and 2(2) of the Options Linkage
Plan.
45 Section 5(a)(ii) of the Options Linkage Plan.
46 See Rule 611(a) of Regulation NMS (17 CFR
242.611(a)).
47 15 U.S.C. 78k–1(a)(1)(C).
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611(a). The Commission believes that a
policies and procedures-based approach
to preventing Trade-Throughs in
options is reasonable given the
increasingly high volume of trading in
options, and the latencies and other
discrepancies in the delivery and
receipt of quotation data. The
requirement of written policies and
procedures, as well as the responsibility
assigned to Participants to regularly
surveil to ascertain the effectiveness of
their procedures and take prompt
remedial steps, is designed to achieve
the objective of eliminating all TradeThroughs that reasonably can be
prevented, while also recognizing the
inherent difficulties of eliminating
Trade-Through transactions that,
despite a Participant’s reasonable
efforts, may occur.
The Commission believes that each
Participant’s policies and procedures
must enable it to monitor, on a real-time
basis, the Protected Quotations
displayed by Eligible Exchanges so as to
determine the prices at which the
Participant can and cannot execute
trades. In addition, the Commission
believes that a Participant’s policies and
procedures must establish objective
standards and parameters governing its
use of the exceptions set forth in Section
5(b) of the Options Linkage Plan,
discussed below, and expects each
Participant’s order-handling and trading
systems to be programmed in
accordance with these policies and
procedures. Finally, the Participant
must take such steps as are necessary to
enable it to enforce its policies and
procedures effectively. For example, the
Commission believes that Participants
will need to establish procedures such
as regular exception reports to evaluate
their trading and order-routing
practices. The Commission believes that
each Participant Exchange will need to
examine such reports to affirm that its
policies and procedures have been
followed by its personnel and properly
coded into its systems and, if not, to
promptly identify the reasons and take
remedial action.48
Participants’ obligations under the
Options Linkage Plan to maintain and
enforce policies and procedures
reasonably designed to prevent TradeThroughs is reinforced by the Options
Linkage Plan’s explicit assignment of
responsibility to Participants to surveil
to ascertain the effectiveness of their
policies and procedures. Participants
cannot merely establish policies and
procedures that may be reasonable
when created and assume that such
policies and procedures continue to
48 See
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satisfy the requirements of the Options
Linkage Plan. Rather, the Commission
believes that Participants must regularly
assess the continuing effectiveness of
their procedures and take prompt action
when needed to remedy deficiencies. In
particular, Participants must engage in
regular surveillance to determine
whether Trade-Throughs are occurring
without an applicable exception and
whether they have failed to implement
and maintain policies and procedures
that would have reasonably prevented
such Trade-Throughs. Further, this
requirement is an important element of
a Participant’s obligations under Rule
608(c) of Regulation NMS, which
require that each self-regulatory
organization, absent reasonable
justification or excuse, enforce
compliance with any national market
system plan by its members and persons
associated with its members.49
2. Exceptions to Trade-Throughs
The Options Linkage Plan provides
exceptions for certain transactions from
the prohibition against TradeThroughs.50 The Options Linkage Plan
also provides that, if a Participant relies
on an exception, it would be required to
establish, maintain, and enforce written
policies and procedures reasonably
designed to assure compliance with the
terms of the exception.51 Except for the
proposed exception for stopped orders
and price improvement,52 the
exceptions in the Options Linkage Plan
correspond to trade-through exceptions
found in either the Current Plan or in
Regulation NMS.53 The Options Linkage
Plan includes the following exceptions
from the prohibition against TradeThroughs: system issues; 54 trading
rotations; 55 crossed markets; 56
intermarket sweep orders; 57 quote
flickering; 58 non-firm quotes; 59
complex trades; 60 customer stopped
orders; 61 stopped orders and price
49 17
CFR 242.608(c).
Proposed Plan Notice at 15012, supra note
8, for a more detailed description of the proposed
Trade-Through exceptions.
51 Section 5(a)(i) of the Options Linkage Plan.
52 Section 5(b)(x) of the Options Linkage Plan.
53 Rule 611 of Regulation NMS, known also as the
Order Protection Rule, governs trade-through
liability for NMS Stocks. See 17 CFR 242.611.
54 Section 5(b)(i) of the Options Linkage Plan.
55 Section 5(b)(ii) of the Options Linkage Plan.
56 Section 5(b)(iii) of the Options Linkage Plan.
For the definition of a ‘‘Crossed Market,’’ see infra
note 119 and accompanying text.
57 Section 5(b)(iv)–(v) of the Options Linkage
Plan.
58 Section 5(b)(vi) of the Options Linkage Plan.
59 Section 5(b)(vii) of the Options Linkage Plan.
60 Section 5(b)(viii) of the Options Linkage Plan.
61 Section 5(b)(ix) of the Options Linkage Plan.
50 See
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improvement; 62 and benchmark
trades.63
The Commission believes these
exceptions will permit a workable
intermarket price protection structure
for the options market, and are
consistent with the principle of price
protection. As discussed below, the
Commission finds that each of these
exceptions is in the public interest,
appropriate for the protection of
investors and the maintenance of fair
and orderly markets,64 and believes
each assures fair competition among
exchange markets, consistent with
Section 11A(a)(1)(C) of the Act.65
System Issues: 66 This exception,
similar to an exception in the Current
Plan, permits a Participant to trade
through a Protected Quotation if the
Eligible Exchange displaying the
Protected Quotation that was traded
through was experiencing a failure,
material delay, or malfunction of its
systems or equipment when the TradeThrough occurred. This exception gives
Participants a ‘‘self-help’’ remedy if
another Eligible Exchange repeatedly
fails to provide an immediate response
to incoming orders attempting to access
its quotes. As the Commission stated in
approving a parallel exception for stocks
under Regulation NMS, the Eligible
Exchange receiving an order can only be
held responsible for its own turnaround
time (i.e., from the time it first received
an order to the time it transmits a
response to the order). Accordingly, the
routing exchange will be required to
develop policies and procedures that
allow for any potential delays in
transmission not attributable to the
receiving exchange. This exception also
covers any failure or malfunction of an
Eligible Exchange’s systems or
equipment, as well as any material
delay.67
Participants will need to establish
specific objective parameters governing
their use of this ‘‘self-help’’ exemption
as part of their reasonable policies and
procedures. The Commission believes,
for example, a single failure to respond
within one second generally will not
justify future bypassing of another
Eligible Exchange’s quotations. Many
failures to respond within one second in
a short time period, in contrast, clearly
will warrant use of the exception. The
Commission believes that a Participant
making use of this exception must
notify the non-responding Eligible
62 Section
5(b)(x) of the Options Linkage Plan.
5(b)(xi) of the Options Linkage Plan.
64 17 CFR 242.608(b)(2).
65 15 U.S.C. 78k–1(a)(1)(C).
66 Section 5(b)(i) of the Options Linkage Plan.
67 See NMS Release at 37535, supra note 29.
63 Section
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Exchange immediately after (or at the
same time as) electing this exception
pursuant to reasonable and objective
standards contained in its policies and
procedures in order to alert the nonresponding Eligible Exchange that the
Participant intends to make use of this
exception with respect to the nonresponding Eligible Exchange’s
quotes.68
The Commission believes that a
Participant should be entitled to bypass
an away market’s quotations if that
market fails to respond to incoming
orders attempting to access a displayed
quote. The Commission believes that
this exception will provide Participants
with the necessary flexibility for dealing
with problems that occur on an away
market during the trading day. Further,
the Commission finds that this
exception is in the public interest,
appropriate for the protection of
investors and the maintenance of fair
and orderly markets,69 and believes it
assures fair competition among
exchange markets, consistent with
Section 11A(a)(1)(C) of the Act.70
Trading Rotations: 71 This exception,
which is carried over from the Current
Plan 72 and similar to an exception
available for NMS stocks under
Regulation NMS,73 permits a Participant
to trade through a Protected Quotation
disseminated by an Eligible Exchange
during a trading rotation. Options
exchanges use a trading rotation to open
an option for trading or reopen an
option after a trading halt.
As noted by the Participants, the
trading rotation is effectively a single
price auction to price the option,74 and
there are no practical means to include
prices on other exchanges in that
auction.75 As such, the Commission
emphasizes that the exception will not
permit a Participant to declare a trading
halt merely to be able to circumvent the
operation of the Options Linkage Plan’s
Trade-Through provisions upon
reopening; instead, the Commission
believes a Participant must conduct,
pursuant to its rules, a formalized and
transparent process for executing orders
during reopening after a trading halt
that involves the queuing and ultimate
68 Id.
69 17
CFR 242.608(b)(2).
U.S.C. 78k–1(a)(1)(C).
71 Section 5(b)(ii) of the Options Linkage Plan.
72 See Section 8(c)(iii)(E) of the Current Plan.
73 See Rule 611(b)(3) of Regulation NMS under
the Act (17 CFR 242.611(b)(3)).
74 See ISE Letter 2 and NYSE Arca Letter 2, supra
note 5; see also Amex Letter 2, BSE Letter 2, CBOE
Letter 2, Nasdaq Letter 2, and Phlx Letter 2, supra
note 7.
75 See ISE Letter 2 and NYSE Arca Letter 2, supra
note 5; see also Amex Letter 2, BSE Letter 2, Nasdaq
Letter 2, and Phlx Letter 2, supra note 7.
70 15
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execution of multiple orders at a single
equilibrium price. In addition, a
Participant must have formally declared
a trading halt pursuant to its rules.
Therefore, the Commission finds that it
is reasonable to include this as an
exception to the general prohibition on
Trade-Throughs as it is in the public
interest, appropriate for the protection
of investors and the maintenance of fair
and orderly markets,76 and believes it
assures fair competition among
exchange markets, consistent with
Section 11A(a)(1)(C) of the Act.77
Crossed Markets: 78 This exception
permits a Participant to trade through a
Protected Quotation when the market is
crossed, and corresponds to an
exception for NMS stocks under
Regulation NMS.79 A Crossed Market
occurs when a Protected Bid is higher
than a Protected Offer in a given options
class. The Commission believes that it is
appropriate to permit executions
without regard to Trade-Throughs in a
Crossed Market because allowing such
transactions should permit the market to
quickly resolve any unintentional
crosses. For the foregoing reasons, the
Commission finds that this exception is
in the public interest, appropriate for
the protection of investors and the
maintenance of fair and orderly
markets,80 and believes it assures fair
competition among exchange markets,
consistent with Section 11A(a)(1)(C) of
the Act.81
Intermarket Sweep Orders: 82 The
Options Linkage Plan includes two
exceptions from the prohibition against
Trade-Throughs for certain transactions
involving ISOs. These two exceptions
correspond to the exceptions relating to
ISOs for NMS stocks under Regulation
NMS.83 First, the Options Linkage Plan
permits a Participant to execute orders
marked as ISOs even when the
Participant is not at the national best bid
or offer (‘‘NBBO’’). Second, a Participant
is permitted to execute a transaction
when such transaction is not at the
NBBO, provided it simultaneously
‘‘sweeps’’ all better priced Protected
Quotations by routing an ISO to execute
against the full displayed size of any
Protected Quotation that was traded
through.
76 17
CFR 242.608(b)(2).
U.S.C. 78k–1(a)(1)(C).
78 Section 5(b)(iii) of the Options Linkage Plan.
79 See Rule 611(b)(4) of Regulation NMS (17 CFR
242.611(b)(4)).
80 17 CFR 242.608(b)(2).
81 15 U.S.C. 78k–1(a)(1)(C).
82 Section 5(b)(iv) and (v) of the Options Linkage
Plan.
83 See Rule 611(b)(5) and (6) of Regulation NMS
(17 CFR 242.611(b)(5) and (6)).
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An ISO is defined as a limit order for
an options series that, when routed to
an Eligible Exchange, is identified as an
Intermarket Sweep Order and,
simultaneously with the routing of the
order, one or more additional orders, as
necessary, are routed to execute against
the full displayed size of any Protected
Bid, in the case of a limit order to sell,
or any Protected Offer, in the case of a
limit order to buy, for the options series
with a price that is superior to the limit
price of the order.84 Any such
additional orders would also be marked
as ISOs.
The availability of ISOs will allow the
Participants to access multiple price
levels simultaneously displayed on the
same or multiple markets, without
violating the prohibition against TradeThroughs. As the Commission stated
with respect to ISOs for stocks under
Regulation NMS, the Commission
believes that allowing a Participant to
immediately execute an order identified
as an ISO when that exchange is not at
the NBBO is fully consistent with the
principle of protecting the best
displayed prices because the exception
is premised on the condition that the
market participant sending the ISO has
already attempted to access all betterpriced Protected Quotations up to their
displayed size. Consequently, there is
no reason why a Participant that
receives an ISO while displaying an
inferior-priced quotation should be
required to delay an execution of the
order.85 This exception should help to
ensure more efficient and faster
executions.
The second ISO Trade-Through
exception, under subparagraph (b)(v) of
Section 5 of the Options Linkage Plan,
should benefit market participants in
their ability to handle orders efficiently.
For example, market participants should
be able to use this exception to more
efficiently execute block trades one or
more minimum price increments away
from the NBBO. So long as ISOs are
simultaneously routed to execute
against better-priced Protected
Quotation on other markets, the block
order could be executed
contemporaneously with the routing of
the ISOs.
The Commission notes that Section
5(c) of the Options Linkage Plan
requires Participants to take reasonable
steps to establish that ISOs are properly
routed in an attempt to execute against
all applicable Protected Quotations.
For the reasons stated above, the
Commission finds that the exception
from Trade-Through liability when an
84 Section
85 See
2(9) of the Options Linkage Plan.
NMS Release at 37523, supra note 29.
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exchange or market participants sends
an ISO is in the public interest,
appropriate for the protection of
investors and the maintenance of fair
and orderly markets,86 and believes it
assures fair competition among
exchange markets, consistent with
Section 11A(a)(1)(C) of the Act.87
Quote Flickering: 88 Subparagraph
(b)(vi) of Section 5 of the Options
Linkage Plan sets forth an exception for
flickering quotations, and corresponds
to an exception for NMS stocks under
Regulation NMS.89 It excepts a
transaction if the Eligible Exchange
displaying the Protected Quotation that
was traded through had displayed,
within one second prior to execution of
the Trade-Through, a Best Bid or Best
Offer, as applicable, for the options
series with a price that was equal or
inferior to the price of the TradeThrough transaction.
As the Commission stated with
respect to the similar exception for
stocks under Regulation NMS,90 this
exception thereby provides a ‘‘window’’
to address false indications of TradeThroughs that in actuality are
attributable to rapidly moving
quotations. It should also reduce the
number of instances in which a
Participant must alter its normal trading
procedures and route orders to other
trading centers to comply with the
Options Linkage Plan. The exception is
thereby intended to promote more
workable intermarket price protection.
The Commission finds it is in the public
interest, appropriate for the protection
of investors and the maintenance of fair
and orderly markets,91 and believes it
assures fair competition among
exchange markets, consistent with
Section 11A(a)(1)(C) of the Act.92
Non-Firm Quotes: 93 This exception,
which is carried over from the Current
Plan,94 permits a Participant to trade
through a Protected Quotation that was
‘‘Non-Firm.’’ 95 ‘‘Non-Firm’’ is defined
to mean, with respect to Quotations in
an Eligible Options Class, that members
of a Participant are relieved of their
obligations under that Participant’s firm
quote rule in that Eligible Options
Class.96
86 17
CFR 242.608(b)(2).
U.S.C. 78k–1(a)(1)(C).
88 Section 5(b)(vi) of the Options Linkage Plan.
89 See Rule 611(b)(8) of Regulation NMS (17 CFR
242.611(b)(8)).
90 See NMS Release at 37536, supra note 29.
91 17 CFR 242.608(b)(2).
92 15 U.S.C. 78k–1(a)(1)(C).
93 Section 5(b)(vii) of the Options Linkage Plan.
94 See Section 8(c)(iii)(C) of the Current Plan.
95 See Section 2(11) of the Options Linkage Plan.
96 The Commission notes that, when quotations in
an Eligible Options Class are Non-Firm, exchange
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The Commission believes that
Participants should not be required to
protect the price of an away market
when that market identifies its quotes as
‘‘Non-Firm.’’ The Commission finds that
this exception is in the public interest,
appropriate for the protection of
investors and the maintenance of fair
and orderly markets,97 and believes it
assures fair competition among
exchange markets, consistent with
Section 11A(a)(1)(C).98
Complex Trades: 99 This exception
carries forward the complex trade
exception in Section 8(c)(iii)(G) of the
Current Plan 100 and permits a
Participant to trade through a Protected
Quotation if the transaction was part of
a ‘‘complex trade.’’ The definition of
‘‘complex trade’’ would be implemented
through rules adopted by the
Participants, which would be subject to
notice, comment, and Commission
review pursuant to the Section 19(b)
rule filing process.
Complex trades, such as those
submitted by market participants under
the Proposing Exchanges complex order
mechanisms,101 are composed of
multiple transactions effected at a net
price. As the Proposing Exchanges
state,102 it is not always practical to
require each leg to be transacted at a
price that does not constitute a TradeThrough, and the Commission believes
that permitting an exception for
transactions effected as a portion of a
complex trade is appropriate. By
narrowly crafting the definition of
complex trades in each Participants’
rules,103 the Commission believes that
this exception will not undercut the
general Trade-Through protections of
the Options Linkage Plan, and finds it
is in the public interest, appropriate for
the protection of investors and the
maintenance of fair and orderly
markets,104 and believes it assures fair
competition among exchange markets,
consistent with Section 11A(a)(1)(C).105
rules require the exchange to provide notice that its
quotations are Non-Firm by appending an indicator
to its quotations. See, e.g., CBOE Rule 43.14(b) and
NYSE Arca Rule 6.86(d)(1)(C).
97 17 CFR 242.608(b)(2).
98 15 U.S.C. 78k–1(a)(1)(C).
99 Section 5(b)(viii) of the Options Linkage Plan.
100 Section 8(c)(iii)(G) of the Current Plan.
101 See, e.g., ISE Rule 722.
102 See ISE Letter 2 and NYSE Arca Letter 2,
supra note 5; see also Amex Letter 2, BSE Letter 2,
CBOE Letter 2, Nasdaq Letter 2, and Phlx Letter 2,
supra note 7.
103 All changes to rules of national securities
exchanges are subject to notice, comment and
Commission review pursuant to Section 19(b) of the
Act. 15 U.S.C. 78s(b).
104 17 CFR 242.608(b)(2).
105 15 U.S.C. 78k–1(a)(1)(C).
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Customer Stopped Orders: 106 This
exception permits a Participant to trade
through a Protected Quotation if the
trade executed a ‘‘stopped order.’’ The
exception requires that the ‘‘stopped
order’’ be for the account of a
Customer; 107 that the Customer agreed
to the specified price on an order-byorder basis; and that the price of the
Trade-Through was, for a stopped buy
order, lower than the national Best Bid
in the options series at the time of
execution, or, for a stopped sell order,
higher than the national Best Offer in
the options series at the time of
execution. This exception corresponds
to the customer stopped order exception
under Regulation NMS.108
The Commission recognizes that the
use of stopped orders is a valuable tool,
particularly for the execution of large
orders.109 The Commission believes that
this narrowly-drawn exception would
give market participants the ability to
execute large Customer orders over time
at a price agreed upon by a Customer,
even though the price of the option may
change before the order is executed in
its entirety, without undermining the
general principles of price protection
under the Options Linkage Plan. For
these reasons, the Commission finds
that this exception is in the public
interest, appropriate for the protection
of investors and the maintenance of fair
and orderly markets,110 and assures fair
competition among exchange markets,
consistent with Section 11A(a)(1)(C) of
the Act.111
Stopped Orders and Price
Improvement: 112 This exception
permits a Participant to trade through a
Protected Quotation if the transaction
that constituted the Trade-Through was
the execution by a Participant of an
order that is stopped at a price that did
not constitute a Trade-Through at the
time of the stop. This exception allows
a Participant to seek price improvement
for an order, even if the market moves
in the interim, and the transaction
ultimately is effected at a price that
would trade through the then currentlydisplayed market. The rules of several of
the Proposing Exchanges currently
5(b)(ix) of the Options Linkage Plan.
would be defined to mean an
individual or organization that is not a ‘‘Broker/
Dealer.’’ See Section 2(5) of the Options Linkage
Plan.
108 See Rule 611(b)(9) of Regulation NMS (17 CFR
242.611(b)(9)).
109 See NMS Release at 37527, supra note 29.
110 17 CFR 242.608(b)(2).
111 15 U.S.C. 78k–1(a)(1)(C).
112 Section 5(b)(x) of the Options Linkage Plan.
contain provisions relating to price
improvement mechanisms.113
These price improvement
mechanisms offer price improvement to
orders received by the exchange during
a specified period of time (‘‘auction’’).
During this auction period, the NBBO
could move from where it was when the
order was received. However, the
exchange is only required to guarantee
a price no worse than the NBBO at the
time the order was received. Thus,
following the auction, an execution
could result in a Trade-Through if the
NBBO improves from the time the order
was received although, had the order
been executed at the time of receipt, the
execution would not have resulted in a
Trade-Through.
This exception would allow a
Participant to seek price improvement
for an order, even if the market moves
in the interim, and the transaction
ultimately is effected at a price that
would trade through the then currentlydisplayed market. By allowing this
exception, the Commission expects that
Participants would be able to continue
to use price improvement mechanisms,
thereby offering market participants
potentially better-priced executions.
The Commission finds that this
exception is in the public interest,
appropriate for the protection of
investors and the maintenance of fair
and orderly markets,114 and believes it
assures fair competition among
exchange markets, consistent with
Section 11A(a)(1)(C) of the Act.115
Benchmark Trades: 116 This exception
permits a Participant to trade through a
Protected Quotation if the trade was
executed at a price not based directly or
indirectly on the quoted price of an
options series at the time of execution
and for which the material terms were
not reasonably determinable at the time
of the commitment to make the trade.
This exception allows a ‘‘benchmark
order’’ and corresponds to an exception
for NMS stocks under Rule 611 of
Regulation NMS.117 A common example
of a benchmark order for NMS stocks is
a volume-weighted average price, or
‘‘VWAP,’’ order. The Commission notes
that none of the Proposing Exchanges
currently permit these types of options
trades, and any Participant seeking to
make use of this exception would be
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113 See, e.g., Securities Exchange Act Release No.
50819 (December 8, 2004), 69 FR 75093 (December
15, 2004) (SR–ISE–2003–06) (approving rules
implementing ISE’s Price Improvement Mechanism
under ISE Rule 723).
114 17 CFR 242.608(b)(2).
115 15 U.S.C. 78k–1(a)(1)(C).
116 Section 5(b)(xi) of the Options Linkage Plan.
117 See Rule 611(b)(7) of Regulation NMS (17 CFR
242.611(b)(7)).
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required to submit a proposed rule
change which would be subject to
notice, comment and Commission
review under Section 19(b) of the Act.
The Commission finds that this
exception is in the public interest,
appropriate for the protection of
investors and the maintenance of fair
and orderly markets, and believes it
assures fair competition among
exchange markets, consistent with
Section 11A(a)(1)(C) of the Act.118
B. Locked and Crossed Markets
The Options Linkage Plan also
addresses Locked and Crossed
Markets.119 The requirements in the
Options Linkage Plan relating to Locked
and Crossed Markets are virtually
identical to those applicable to market
centers for NMS stock under Regulation
NMS.120
Specifically, the Options Linkage Plan
requires each Participant to establish,
maintain, and enforce written rules that
require their members reasonably to
avoid displaying Locked and Crossed
Markets.121 Participants would also be
required to establish, maintain, and
enforce written rules reasonably
designed to assure the reconciliation of
Locked and Crossed Markets.122 Finally,
the Options Linkage Plan would provide
that Participants must establish,
maintain, and enforce written rules that
prohibit their members from engaging in
a pattern or practice of displaying
Locked and Crossed Markets, subject to
exceptions as may be contained in the
Participants’ rules, as approved by the
Commission.123
The Commission recognizes that
Section 6 of the Options Linkage Plan,
by restricting Locked Markets, can
prohibit the display of an order that
would otherwise have been displayed
and reduced the quoted spread to zero.
However, as the Commission stated
with respect to locked markets for
stocks under Regulation NMS, the
118 15
U.S.C. 78k–1(a)(1)(C).
6 of the Options Linkage Plan. A
‘‘Locked Market’’ is defined as a quoted market in
which a Protected Bid is equal to a Protected Offer
in a series of an Eligible Options Class. See Section
2(10) of the Options Linkage Plan. A ‘‘Crossed
Market’’ is defined as a quoted market in which a
Protected Bid is higher than a Protected Offer in a
series of an Eligible Options Class. See Section 2(4)
of the Options Linkage Plan.
120 See Rule 610(d) of Regulation NMS (17 CFR
242.610(d)).
121 Section 6(a) of the Options Linkage Plan.
122 Section 6(b) of the Options Linkage Plan.
123 Section 6(c) of the Options Linkage Plan. The
Commission notes that the proposed rule changes
relating to all necessary implementing rules of the
Participants, including those required by Section 6
of the Options Linkage Plan, would be subject to
notice, comment, and Commission review pursuant
to Section 19(b) of the Act.
119 Section
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Commission believes that Locked
Markets may not actually represent two
market participants willing to buy and
sell at the same price. Instead, a locking
market participant may not truly be
willing to trade at the displayed locking
price, but chooses to lock rather than
execute against the already-displayed
quotation to receive a liquidity rebate.
The Commission believes that giving
priority to the first-displayed Protected
Bid or Protected Offer, particularly
when it includes a public customer’s
order, will encourage price discovery
and contribute to fair and orderly
markets.124
The Options Linkage Plan is designed
to ensure that the display of locked and
crossed markets would be restricted,
while also recognizing that locked and
crossed markets do occur accidentally
and cannot always be avoided. Thus,
the Options Linkage Plan requires that
the Participants have written rules that
are reasonably designed to assure the
reconciliation of any lock or cross.
Further, the Options Linkage Plan
expressly prohibits a pattern or practice
of locking or crossing away markets.
In addition, the Options Linkage Plan
would allow exceptions to its general
Locked and Crossed Markets provision
as might be contained in a given
Participant’s rules. As with all proposed
rule changes of national securities
exchanges, such rule changes would be
subject to notice, comment and
Commission review under Section
19(b)(1) of the Act.125 The Commission
believes that these provisions are
designed to ensure that the display of
Locked and Crossed Markets will be
limited and that any such display will
be promptly reconciled.
For the reasons stated above, the
Commission finds that the Options
Linkage Plan’s provisions relating to
Locked and Crossed Markets are in the
public interest, appropriate for the
protection of investors and the
maintenance of fair and orderly
markets,126 and believes they assure fair
competition among exchange markets,
consistent with Section 11A(a)(1)(C).127
C. Joining the Proposed Plan
Any national securities exchange
would be eligible to become a
Participant by executing a copy of the
Options Linkage Plan and providing
each Participant with a copy of such
executed Options Linkage Plan 128 if it
is: (1) Registered with the Commission
124 See
NMS Release at 37547, supra note 29.
U.S.C. 78s(b)(1).
126 17 CFR 242.608(b)(2).
127 15 U.S.C. 78k–1(a)(1)(C).
128 Section 3(c) of the Options Linkage Plan.
125 15
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in accordance with Section 6(a) of the
Act; (2) a Participant Exchange in
OCC; 129 and (3) a party to the OPRA
Plan.130 Further, any such national
securities exchange wishing to become
a Participant would be required to file
an amendment to the Options Linkage
Plan by executing a copy of the Options
Linkage Plan and filing such executed
Options Linkage Plan to the
Commission.131 Such amendment
would be effective when the
amendment is approved by the
Commission or otherwise becomes
effective pursuant to Section 11A of the
Act and Rule 608 thereunder.132 The
Commission finds that this process for
joining the Options Linkage Plan is in
the public interest,133 and believes it is
consistent with Section 11A(a)(1)(C)
because it is designed to ensure that
reasonable procedures are in place to
permit additional exchanges to also
participate in the Options Linkage
Plan.134
D. Withdrawal From the Proposed Plan
Any Participant would be able to
withdraw from the Options Linkage
Plan at any time by providing not less
than 30 days’ prior written notice to
each of the other Participants of such
intent to withdraw.135 To withdraw,
such Participant also would be required
to effect an amendment to the Options
Linkage Plan by submitting such
amended Options Linkage Plan to the
Commission for approval.136 In
submitting the amended Options
Linkage Plan to the Commission, the
Participant proposing to withdraw from
the Options Linkage Plan would be
required to state how the Participant
plans to accomplish, by alternate means,
the goal of the Options Linkage Plan
regarding limiting Trade-Throughs of
prices on other exchanges trading the
same options classes.137 Such
withdrawal from the Options Linkage
Plan would be effective when the
amendment is approved by the
129 For a definition of a ‘‘Participant Exchange,’’
see Section VII of the OCC by-laws.
130 For more information on who is a party to the
OPRA Plan, see Section I of the OPRA Plan.
131 Section 4(b) of the Options Linkage Plan.
132 Id. These requirements are identical to those
contained in the Current Plan. See Sections 4(c)(i)
and 5(c) of the Current Plan. The Current Plan also
requires that an eligible exchange pay a fee to join
the Current Plan. See Section 4(c)(i)(iv) of the
Current Plan. The Options Linkage Plan does not
require an Eligible Exchange to pay a fee to join the
Options Linkage Plan.
133 17 CFR 242.608(b)(2).
134 15 U.S.C. 78k–1(a)(1)(C).
135 Section 3(d) of the Options Linkage Plan.
136 Section 4(c) of the Options Linkage Plan.
137 Id. These requirements are identical to those
contained in the Current Plan. See Sections 4(d)
and 5(c)(iii) of the Current Plan.
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39369
Commission or otherwise becomes
effective pursuant to Section 11A of the
Act and Rule 608 thereunder. Upon the
effectiveness of such withdrawal, the
withdrawing Participant would have no
further rights or obligations under the
Options Linkage Plan.
The Commission finds that these
requirements for withdrawal from the
Options Linkage Plan are in the public
interest, appropriate for the protection
of investors and the maintenance of fair
and orderly markets,138 and believes it
assures fair competition among
exchange markets, consistent with
Section 11A(a)(1)(C).139
E. Implementation
The Proposed Plan states that the
‘‘[Participants] shall implement [the
plan] * * * no later than February 27,
2009; provided that, unless the
[Commission] otherwise authorizes, the
[Participants] shall not implement [the
plan] until all Eligible Exchanges either
(1) have become parties to [the plan]
and the [Commission] has approved all
necessary implementing rules or (2)
have developed the ability to accept and
execute incoming Intermarket Sweep
Orders.’’ 140
To provide clarity to market
participants regarding the
implementation date of the plan, the
Commission, after consultation with the
Proposing Exchanges, has modified the
Proposed Plan to change the
implementation date in Section 7 from
February 27, 2009 to August 31, 2009.
In addition, the Commission notes that
all seven options exchanges 141 have
joined in filing the Proposed Plan with
the Commission, and each has
submitted proposed rule changes
pursuant to Section 19(b) of the Act to
modify its rules to comply with the
Options Linkage Plan.142 The
Commission believes that the provision
that would permit the plan to be
implemented if an Eligible Exchange
‘‘developed the ability to accept and
execute incoming Intermarket Sweep
Orders,’’ even if such exchange had not
become a party to the plan is no longer
necessary because all seven options
exchanges have joined the Options
138 17
CFR 242.608(b)(2).
U.S.C. 78k–1(a)(1)(C).
140 See Section 7 of the Proposed Plan.
141 That is, CBOE, ISE, Nasdaq, BX, Phlx, Amex
and NYSE Arca.
142 See, e.g., Securities Exchange Act Release Nos.
60014 (June 1, 2009); and 74 FR 27224 (June 8,
2009) (SR–ISE–2009–27) and 60015 (June 1, 2009);
74 FR 27375 (June 9, 2009) (SR–NYSEAmex–2009–
19) which propose rules such as provisions that
contain relevant definitions, an order protection
rule, and a locked and crossed market rule, which
correspond to the provisions in the Options Linkage
Plan.
139 15
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Linkage Plan and therefore will, upon
implementation of the Options Linkage
Plan, accept and execute ISOs.
The Commission finds that these
modifications to Section 7 of the
Proposed Plan are necessary and
appropriate and will further the
purposes of the Act by providing clarity
to market participants regarding the
implementation of the plan while
providing appropriate time to selfregulatory organizations to prepare for
implementation.
With these modifications, unless the
Commission otherwise authorizes, the
plan may only be implemented by the
Proposing Exchanges when all
Proposing Exchanges’ proposed rule
changes containing the necessary
implementing rules 143 have been
approved by the Commission.
IV. Conclusion
It is hereby ordered, that pursuant to
Section 11A(a)(3)(B) of the Act 144 and
Rule 608 thereunder,145 that the
Proposed Plan submitted by CBOE, ISE,
Nasdaq, BX, Phlx, Amex, and NYSE
Arca, as modified herein, is approved
and declared effective,146 and that
CBOE, ISE, Nasdaq, BX, Phlx, Amex,
and NYSE Arca are authorized to act
jointly to implement the Options Order
Protection and Locked/Crossed Market
Plan as a means of facilitating a national
market system.
By the Commission.
Florence E. Harmon,
Deputy Secretary.
Appendix A
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Options Order Protection and Locked/
Crossed Market Plan
Section 1—Preamble
The Participants submit to the SEC this
Plan providing a framework for order
protection and addressing Locked and
Crossed Markets in Eligible Options Classes.
The purpose of the Plan is to enable the
Participants to act jointly in establishing a
framework for providing order protection and
addressing Locked and Crossed Markets in
Eligible Options Classes. In addition, the
Plan provides for a non-exclusive method for
achieving order protection and addressing
Locked and Crossed Markets. The
Participants will submit to the SEC for
approval their respective rules that will
implement the framework of the Plan. The
Participants request that the SEC issue an
order pursuant to Section 11A(a)(3)(B) of the
Exchange Act and Rule 608 thereunder
evidencing its approval of the Plan.
143 See
id.
U.S.C. 78k–1(a)(3)(B).
145 17 CFR 242.608.
146 The approved Plan is attached here as
Appendix A.
144 15
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Section 2—Definitions
(1) ‘‘Best Bid’’ and ‘‘Best Offer’’ mean the
highest priced Bid and the lowest priced
Offer.
(2) ‘‘Bid’’ or ‘‘Offer’’ means the bid price
or the offer price communicated by a member
of an Eligible Exchange to any Broker/Dealer,
or to any customer, at which it is willing to
buy or sell, as either principal or agent, but
shall not include indications of interest.
(3) ‘‘Broker/Dealer’’ means an individual or
organization registered with the SEC in
accordance with Section 15(b)(1) of the
Exchange Act or a foreign broker or dealer
exempt from such registration pursuant to
Rule 15a–6 under the Exchange Act.
(4) ‘‘Crossed Market’’ means a quoted
market in which a Protected Bid is higher
than a Protected Offer in a series of an
Eligible Class.
(5) ‘‘Customer’’ means an individual or
organization that is not a Broker/Dealer.
(6) ‘‘Eligible Exchange’’ means a national
securities exchange registered with the SEC
in accordance with Section 6(a) of the
Exchange Act that: (a) As a Participant
Exchange in OCC (as that term is defined in
Section VII of the OCC by-laws); (b) is a party
to the OPRA Plan (as that term is described
in Section I of the OPRA Plan); and (c) if the
national securities exchange chooses not to
become a party to this Plan, is a participant
in another plan approved by the Commission
providing for comparable Trade-Through and
Locked and Crossed Market protection.
(7) ‘‘Eligible Options Class’’ means all
option series overlying a security (as that
term is defined in Section 3(a)(10) of the
Exchange Act) or group of securities,
including both put options and call options,
which class is available for trading on two or
more Eligible Exchanges.
(8) ‘‘Exchange Act’’ means the Securities
Exchange Act of 1934, as amended.
(9) ‘‘Intermarket Sweep Order (ISO)’’
means a limit order for an options series that
meets the following requirements:
(a) When routed to an Eligible Exchange,
the order is identified as an ISO;
(b) Simultaneously with the routing of the
order, one or more additional ISOs, as
necessary, are routed to execute against the
full displayed size of any Protected Bid, in
the case of a limit order to sell, or any
Protected Offer, in the case of a limit order
to buy, for the options series with a price that
is superior to the limit price of the ISO, with
such additional orders also marked as ISOs.
(10) ‘‘Locked Market’’ means a quoted
market in which a Protected Bid is equal to
a Protected Offer in a series of an Eligible
Options Class.
(11) ‘‘Non-Firm’’ means, with respect to
Quotations in an Eligible Options Class, that
members of a Participant are relieved of their
obligations under that Participant’s firm
quote rule in that Eligible Options Class.
(12) ‘‘OCC’’ means The Options Clearing
Corporation.
(13) ‘‘OPRA’’ means the Options Price
Reporting Authority.
(14)’’OPRA Plan’’ means the plan filed
with the SEC pursuant to Section
11Aa(1)(C)(iii) of the Exchange Act, approved
by the SEC and declared effective as of
January 22, 1976, as from time to time
amended.
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(15) ‘‘Participant’’ means an Eligible
Exchange whose participation in the Plan has
become effective pursuant to Section 3(c) of
the Plan.
(16) ‘‘Plan’’ means the plan amended and
restated in this instrument as from time to
time amended in accordance with its
provisions.
(17) ‘‘Protected Bid’’ or ‘‘Protected Offer’’
means a Bid or Offer in an options series,
respectively, that:
a. Is displayed by an Eligible Exchange;
b. Is disseminated pursuant to the OPRA
Plan; and
c. Is the Best Bid or Best Offer,
respectively, of an Eligible Exchange.
(18) ‘‘Protected Quotation’’ means a
Protected Bid or Protected Offer.
(19) ‘‘Quotation’’ means a Bid or Offer.
(20) ‘‘SEC’’ means the United States
Securities and Exchange Commission.
(21) ‘‘Trade-Through’’ means a transaction
in an options series, either as principal or
agent, at a price that is lower than a Protected
Bid or higher than a Protected Offer.
Section 3—Parties to the Plan
(a) List of Parties
The parties to the Plan are as follows:
Boston Stock Exchange, Inc., registered as
a national securities exchange under the
Exchange Act and having its principal place
of business at 100 Franklin Street, Boston,
Massachusetts 02110.
Chicago Board Options Exchange,
Incorporated, registered as a national
securities exchange under the Exchange Act
and having its principal place of business at
400 South LaSalle Street, Chicago, Illinois
60605.
International Securities Exchange, LLC,
registered as a national securities exchange
under the Exchange Act and having its
principal place of business at 60 Broad
Street, New York, New York 10004.
The NASDAQ Stock Market LLC,
registered as a national securities exchange
under the Exchange Act and having its
principal place of business at One Liberty
Plaza, 50th Floor, New York, New York
10006.
NASDAQ OMX PHLX, Inc., registered as a
national securities exchange under the
Exchange Act and having its principal place
of business at 1900 Market Street,
Philadelphia, Pennsylvania 19103.
NYSE Alternext US LLC, registered as a
national securities exchange under the
Exchange Act and having its principal place
of business at 11 Wall Street, New York, NY
10005.
NYSE Arca, Inc., registered as a national
securities exchange under the Exchange Act
and having its principal place of business at
100 South Wacker Drive, Suite 1800,
Chicago, IL 60606.
(b) Compliance Undertaking
By subscribing to and submitting the Plan
for filing with the SEC, each Participant
agrees to enforce compliance by its members
with the provisions of the Plan.
(c) Entry of New Participants
The Participants agree that any other
Eligible Exchange may become a Participant
by: (i) Executing a copy of the Plan, as then
in effect; (ii) providing each then-current
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Participant with a copy of such executed
Plan; and (iii) effecting an amendment to the
Plan as specified in Section 4(b) of the Plan.
(d) Withdrawal from the Plan
Any Participant may withdraw from the
Plan at any time by: (i) Providing not less
than 30 days’ prior written notice to each of
the other Participants of such intent to
withdraw; and (ii) effecting an amendment to
the Plan as specified in Section 4(c) of the
Plan. Upon the effectiveness of such
withdrawal the withdrawing Participant shall
have no further rights or obligations
whatsoever under the Plan.
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Section 4—Amendments to the Plan
(a) General Amendment Authority
Except with respect to:
(i) the addition of new Participants to the
Plan; and
(ii) the withdrawal of a Plan Participant,
any proposed change in, addition to, or
deletion from the Plan may be effected only
by means of a written amendment to the Plan
that is unanimously approved by the
Participants and that: (A) sets forth the
change, addition or deletion; (B) is executed
on behalf of each Participant; and (C) is
approved by the SEC or otherwise becomes
effective pursuant to Section 11A of the
Exchange Act and Rule 608 thereunder.
(b) New Participants
With respect to new Participants, an
amendment to the Plan may be effected by
a new Eligible Exchange executing a copy of
the Plan, as then in effect (with the only
change being the addition of the new
Participant’s name in Section 3(a) of the
Plan), and submitting such executed Plan to
the SEC. Such amendment will be effective
when the amendment is approved by the SEC
or otherwise becomes effective pursuant to
Section 11A of the Exchange Act and Rule
608 thereunder.
(c) Withdrawal from the Plan
A Participant seeking to withdraw from the
Plan shall effect an amendment to the Plan
as then in effect (with the only change being
the deletion of the Participant’s name in
Section 3(a) of the Plan) by submitting such
amended Plan to the SEC for approval. In
submitting the amended Plan to the SEC, the
Participant proposing to withdraw from the
Plan shall state how the Participant plans to
accomplish, by alternate means, the goal of
the Plan regarding limiting Trade-Throughs
of prices on other exchanges trading the same
options classes. Such withdrawal from the
Plan shall be effective when the amendment
is approved by the SEC or otherwise becomes
effective pursuant to Section 11A of the
Exchange Act and Rule 608 thereunder.
Section 5—Order Protection
(a) Order Protection
(i) Prevention of Trade-Throughs. Each
Participant agrees that it shall establish,
maintain and enforce written policies and
procedures as approved by the SEC that are
reasonably designed to prevent TradeThroughs in that Participant’s market in
Eligible Options Classes that do not fall
within an exception set forth in paragraph (b)
below, and, if relying on such exception, that
are reasonably designed to assure compliance
with the terms of the exception.
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(ii) Surveillance. Each Participant agrees to
conduct surveillance of its market on a
regular basis to ascertain the effectiveness of
the policies and procedures required by
paragraph (a)(1) of this section, and to take
prompt action to remedy deficiencies in such
policies and procedures.
(b) Exceptions.
(i) The transaction that constituted the
Trade-Through was effected when the
Eligible Exchange displaying the Protected
Quotation that was traded through was
experiencing a failure, material delay, or
malfunction it its systems or equipment;
(ii) The transaction traded through a
Protected Quotation being disseminated by
an Eligible Exchange during a trading
rotation;
(iii) The transaction that constituted the
Trade-Through occurred when there was a
Crossed Market;
(iv) The transaction that constituted the
Trade-Through was the execution of an order
identified as an Intermarket Sweep Order;
(v) The transaction that constituted the
Trade-Through was effected by a Participant
that simultaneously routed an Intermarket
Sweep Order to execute against the full
displayed size of any Protected Quotation
that was traded through;
(vi) The Eligible Exchange displaying the
Protected Quotation that was traded through
had displayed, within one second prior to
execution of the Trade-Through, a Best bid or
Best offer, as applicable, for the options
series with a price that was equal or inferior
to the price of the Trade-Through transaction;
(vii) The Protected Quotation traded
through was being disseminated from an
Eligible Exchange whose Quotations were
Non-Firm with respect to such options series;
(viii) The transaction that constituted the
Trade-Through was effected as a portion of
a ‘‘complex trade,’’ as defined in the rules of
a Participant;
(ix) The transaction that constituted the
Trade-Through was the execution by a
Participant of an order for which, at the time
of receipt of the order, a member of the
Participant had guaranteed an execution at
no worse than a specified price (a ‘‘stopped
order’’), where:
(A) The stopped order was for the account
of a Customer;
(B) the Customer agreed to the specified
price on an order-by-order basis; and
(C) the price of the Trade-Through was, for
a stopped buy order, lower than the national
Best Bid in the options series at the time of
execution, or, for a stopped sell order, higher
than the national Best Offer in the options
series at the time of execution;
(x) The transaction that constituted the
Trade-Through was the execution by a
Participant of an order which was stopped at
a price that did not Trade-Through another
Eligible Exchange at the time of the stop; or
(xi) The transaction that constituted the
Trade-Through was the execution of an order
at a price that was not based, directly or
indirectly, on the quoted price of the options
series at the time of execution and for which
the material terms were not reasonably
determinable at the time the commitment to
execute the order was made.
(c) Intermarket Sweep Orders. Participants
shall take reasonable steps to establish that
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39371
Intermarket Sweep Orders meet the
requirements of Section 2(9) of the Plan.
Section 6—Locked and Crossed Markets
The Participants agree that they shall
establish, maintain and enforce written rules
that:
(a) Require their members reasonably to
avoid displaying Locked and Crossed
Markets;
(b) Are reasonably designed to assure the
reconciliation of Locked and Crossed
Markets; and
(c) Prohibit its members from engaging in
a pattern or practice of displaying Locked
and Crossed Markets;
in all cases subject to such exceptions as may
be contained in the rules of a Participant
approved by the Commission.
Section 7—Implementation
The Parties shall implement this Plan on
a date upon which all Parties agree, but no
later than August 31, 2009; provided that,
unless the SEC otherwise authorizes, the
Parties shall not implement this Plan unless
all Eligible Exchanges have become parties to
this Plan and the SEC has approved all
necessary implementing rules.
Section 8—Counterparts and Signatures
The Plan may be executed in any number
of counterparts, no one of which need
contain all signatures of all Participants, and
as many of such counterparts as shall
together contain all such signatures shall
constitute one and the same instrument.
In Witness Whereof, this Plan has been
executed as of the lll 2009 by each of the
parties hereto.
CHICAGO BOARD OPTIONS EXCHANGE,
INCORPORATED
By: lllllllllllllllllll
Date: llllllllllllllllll
INTERNATIONAL SECURITIES EXCHANGE,
LLC
By: lllllllllllllllllll
Date: llllllllllllllllll
The NASDAQ STOCK MARKET LLC
By: lllllllllllllllllll
Date: llllllllllllllllll
NASDAQ OMX BX, INC.
By: lllllllllllllllllll
Date: llllllllllllllllll
NASDAQ OMX PHLX, Inc.
By: lllllllllllllllllll
Date: llllllllllllllllll
NYSE AMEX LLC
By: lllllllllllllllllll
Date: llllllllllllllllll
NYSE ARCA, INC.
By: lllllllllllllllllll
Date: llllllllllllllllll
[FR Doc. E9–18763 Filed 8–5–09; 8:45 am]
BILLING CODE 8010–01–P
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]]>Agencies
[Federal Register Volume 74, Number 150 (Thursday, August 6, 2009)]
[Notices]
[Pages 39362-39371]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E9-18763]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-60405; File No. 4-546]
Joint Industry Plan; Order Approving the National Market System
Plan Relating to Options Order Protection and Locked/Crossed Markets
Submitted by the Chicago Board Options Exchange, Incorporated,
International Securities Exchange, LLC, The NASDAQ Stock Market LLC,
NASDAQ OMX BX, Inc., NASDAQ OMX PHLX, Inc., NYSE Amex LLC, and NYSE
Arca, Inc.
July 30, 2009.
I. Introduction
The proposed Options Order Protection and Locked/Crossed Market
Plan (``Proposed Plan'') was filed jointly, pursuant to Rule 608 of
Regulation NMS under the Securities Exchange Act of 1934 (``Act'')
(``Regulation NMS'') (``Rule 608''),\1\ by the International Securities
Exchange, LLC (``ISE'') and NYSE Arca, Inc. (``NYSE Arca'') on
September 13, 2007 and September 18, 2007, respectively, with the
Securities and Exchange Commission (``Commission'').\2\ On December 11,
2007, ISE and NYSE Arca separately filed Amendment No. 1 to the
Proposed Plan.\3\ On April 24, 2008, and April 17, 2008, ISE and NYSE
Arca, respectively, filed Amendment No. 2 to the Proposed Plan.\4\ On
November 10,
[[Page 39363]]
2008 and October 31, 2008, ISE and NYSE Arca, respectively, filed
Amendment No. 3 to the Proposed Plan.\5\ On April 30, 2008, May 8,
2008, June 18, 2008, June 18, 2008, and July 9, 2008, respectively,
Chicago Board Options Exchange, Incorporated (``CBOE''), The NASDAQ
Stock Market LLC (``Nasdaq''), American Stock Exchange LLC (``Amex'')
(f/k/a NYSE Alternext US LLC, ``NYSE Alternext,'' n/k/a NYSE Amex LLC,
``NYSE Amex''), Philadelphia Stock Exchange, Incorporated (n/k/a NASDAQ
OMX PHLX, Inc., ``Phlx''), and Boston Stock Exchange, Inc. (``BSE'')
(n/k/a NASDAQ OMX BX, Inc., ``BX'' and together with ISE, NYSE Arca,
CBOE, Nasdaq, Amex, and Phlx, the ``Proposing Exchanges'') filed with
the Commission the Proposed Plan.\6\ On November 25, 2008, November 26,
2008, December 2, 2008, December 4, 2008, and December 5, 2008, CBOE,
NYSE Alternext, BSE, Phlx, and Nasdaq, respectively, filed Amendment
No. 1 to the Proposed Plan.\7\ On April 2, 2009, a detailed summary of
the Proposed Plan was published for comment in the Federal Register.\8\
---------------------------------------------------------------------------
\1\ 17 CFR 242.608.
\2\ See letter from Michael J. Simon, General Counsel, ISE, to
Nancy M. Morris, Secretary, Commission, dated September 12, 2007
(``ISE Letter 1''); and letter from Peter G. Armstrong, Managing
Director, Options, NYSE Arca, to Nancy M. Morris, Secretary,
Commission, dated September 14, 2007 (``NYSE Arca Letter 1'').
\3\ See letter from Michael J. Simon, General Counsel, ISE, to
Nancy M. Morris, Secretary, Commission, dated December 10, 2007; and
letter from Peter G. Armstrong, Managing Director, Options, NYSE
Arca, to Nancy M. Morris, Secretary, Commission, dated December 10,
2007.
\4\ Amendment No. 2 superseded Amendment No. 1 and replaced it
in its entirety. See letter from Michael J. Simon, General Counsel,
ISE, to Nancy M. Morris, Secretary, Commission, dated April 16,
2008; and letter from Peter G. Armstrong, Managing Director,
Options, NYSE Arca, to Nancy M. Morris, Secretary, Commission, dated
April 16, 2008.
\5\ See letter from Michael J. Simon, General Counsel, ISE, to
Florence Harmon, Acting Secretary, Commission, dated November 7,
2008 (``ISE Letter 2''); and letter from Peter G. Armstrong,
Managing Director, Options, NYSE Arca, to Florence Harmon, Acting
Secretary, Commission, dated October 30, 2008 (``NYSE Arca Letter
2'').
\6\ In their respective filings of the Proposed Plan, Amex, BSE,
CBOE, Nasdaq, and Phlx incorporated the changes made by ISE and NYSE
Arca in Amendment No. 2. See letters from Jeffrey P. Burns, Vice
President and Associate General Counsel, Amex, to Nancy M. Morris,
Secretary, Commission, dated June 17, 2008 (``Amex Letter 1'');
Bruce Goodhue, Chief Regulatory Officer, BSE, to Florence Harmon,
Acting Secretary, Commission, dated July 8, 2008 (``BSE Letter 1'');
Edward J. Joyce, President and Chief Operating Officer, CBOE, to
Nancy M. Morris, Secretary, Commission, dated April 29, 2008 (``CBOE
Letter 1''); Jeffrey S. Davis, Vice President and Deputy General
Counsel, The NASDAQ OMX Group, Inc., to Nancy M. Morris, Secretary,
Commission, dated May 7, 2008 (``Nasdaq Letter 1''); and Richard S.
Rudolph, Vice President and Counsel, Phlx, to Nancy M. Morris,
Secretary, Commission, dated June 17, 2008 (``Phlx Letter 1'').
\7\ In their respective Amendment No. 1 to the Proposed Plan,
BSE, CBOE, NYSE Alternext, Phlx, and Nasdaq made changes identical
to those made by ISE and NYSE Arca in Amendment No. 3. See letters
from Edward J. Joyce, President and Chief Operating Officer, CBOE,
to Florence Harmon, Acting Secretary, Commission, dated November 25,
2008 (``CBOE Letter 2''); Jeffrey P. Burns, Managing Director, NYSE
Alternext, to Florence Harmon, Acting Secretary, Commission, dated
November 25, 2008 (``Amex Letter 2''); John Katovich, Vice
President, BSE, to Florence Harmon, Acting Secretary, Commission,
dated December 1, 2008 (``BSE Letter 2''); Richard S. Rudolph, Vice
President and Counsel, Phlx, to Florence Harmon, Acting Secretary,
Commission, dated December 3, 2008 (``Phlx Letter 2''); and Jeffrey
S. Davis, Vice President and Deputy General Counsel, The NASDAQ OMX
Group, Inc., to Florence Harmon, Acting Secretary, Commission, dated
December 4, 2008 (``Nasdaq Letter 2'').
\8\ Securities Exchange Act Release No. 59647 (March 30, 2009),
74 FR 15010 (File No. 4-546) (``Proposed Plan Notice''). The full
text of the Proposed Plan submitted by the Proposing Exchanges, is
available on the Commission's Web site at https://sec.gov/rules/sro/nms/nmsarchive/nms2007.shtml#4-546, at each Proposing Exchange, and
at the Commission's Public Reference Room.
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The Commission received one comment on the Proposed Plan.\9\
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\9\ Letter from John C. Nagel, Managing Director & Deputy
General Counsel, Citadel Investment Group L.L.C. (``Citadel'') to
Nancy M. Morris, Secretary, Commission, dated July 18, 2008
(``Citadel Letter''). The Citadel Letter cited to Citadel's comments
made in a letter from John C. Nagel, Managing Director & Deputy
General Counsel, Citadel to Nancy M. Morris, Secretary, Commission,
dated July 15, 2008 (Petition for Rulemaking to Address Excessive
Access Fees in the Options Markets) (``Petition for Rulemaking'').
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This order approves the Proposed Plan, with changes as the
Commission deems necessary or appropriate, thus authorizing CBOE, ISE,
Nasdaq, BX, Phlx, Amex, and NYSE Arca to act jointly to implement the
Proposed Plan, as modified herein, as a means of facilitating a
national market system in accordance with the requirements of Section
11A of the Act.\10\
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\10\ 15 U.S.C. 78k-1. See also 17 CFR 242.608(b)(2). The
approved Options Order Protection and Locked/Crossed Market Plan,
which incorporates the changes the Commissions deems necessary or
appropriate, is attached here as Appendix A and is referred to
herein as the ``Options Linkage Plan.''
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II. Background
A. Section 11A of the Act
In 1975, Congress directed the Commission, through the enactment of
Section 11A of the Act,\11\ to facilitate the establishment of a
national market system to link together the individual markets that
trade securities. Congress found the development of a national market
system to be in the public interest and appropriate for the protection
of investors and the maintenance of fair and orderly markets to assure
fair competition among the exchange markets.\12\ Section 11A(a)(3)(B)
of the Act directs 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.'' \13\ The Commission's
approval of a national market system plan is conditioned upon a finding
that the proposed plan 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
mechanism of, a national market system, or otherwise in furtherance of
the purposes of the Act.'' \14\
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\11\ 15 U.S.C. 78k-1.
\12\ 15 U.S.C. 78k-1(a)(1)(C).
\13\ 15 U.S.C. 78k-1(a)(3)(B).
\14\ 17 CFR 242.608(b)(2).
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B. Current Plan
Currently, the Proposing Exchanges are signatories to the Plan for
the Purpose of Creating and Operating an Intermarket Option Linkage
(``Current Plan''). The Current Plan is a national market system plan
linking its participants. The Commission approved the Current Plan on
July 28, 2000.\15\ Subsequently, both Pacific Exchange, Inc. (n/k/a
``NYSE Arca'') and Phlx submitted proposed amendments to the Current
Plan to become participants to the Current Plan. These proposed
amendments were approved on November 16, 2000.\16\ On February 5, 2004,
BSE's proposed amendment to become a participant to the Current Plan
became effective.\17\ Further, Nasdaq's proposed amendment to become a
participant to the Current Plan became effective on March 21, 2008.\18\
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\15\ See Securities Exchange Act Release No. 43086 (July 28,
2000), 65 FR 48023 (August 4, 2000) (File No. 4-429).
\16\ See Securities Exchange Act Release Nos. 43573 (November
16, 2000), 65 FR 70851 (November 28, 2000) (File No. 4-429) and
43574 (November 16, 2000), 65 FR 70850 (November 28, 2000) (File No.
4-429).
\17\ See Securities Exchange Act Release No. 49198 (February 5,
2004), 69 FR 7029 (February 12, 2004) (File No. 4-429).
\18\ See Securities Exchange Act Release No. 57545 (March 21,
2008), 73 FR 16394 (March 27, 2008) (File No. 4-429).
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The Current Plan requires its participants to avoid, absent
reasonable justification and during normal market conditions, trading
at a price inferior to that displayed on another market (``trade-
through'').\19\ The Current Plan provides for several exceptions to
trade-through liability, including, among other things, systems
malfunction, failure of the receiving market to respond to an incoming
order within 30 seconds, failure of the market traded through to
complain within the specified time period, complex trades, trading
rotations, and non-firm quotations on the market that was traded
through.\20\ The Current Plan also provides a mechanism by which a
member of a participating exchange
[[Page 39364]]
could seek satisfaction if a customer order is traded through.\21\
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\19\ Section 8(c) of the Current Plan.
\20\ Section 8(c)(iii) of the Current Plan.
\21\ Section 8(c)(ii) of the Current Plan.
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Under the Current Plan, its participants agree that the
dissemination of ``locked'' or ``crossed'' markets should be avoided,
and, if their members lock or cross a market, they should take remedial
actions to unlock or uncross such market.\22\ Further, the Current Plan
contains provisions to address trade comparison, clearing, trading
halts, non-firm quotations, and administration of the Current Plan.\23\
Except with respect to the addition of new participants and the
withdrawal of current participants, any proposed change to the Current
Plan must be approved unanimously by its participants.\24\
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\22\ Section 7(a)(i)(C) of the Current Plan.
\23\ Sections 5, 9, and 10 of the Current Plan.
\24\ Section 5(c)(i) of the Current Plan.
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The participating exchanges comply with the requirements of the
Current Plan, including the prohibition against trade-throughs, by
utilizing a stand alone system (``Linkage Hub'') to send and receive
specific order types. The Linkage Hub is a centralized data
communications network that electronically links the options exchanges
to one another. The Options Clearing Corporation (``OCC'') operates the
Linkage Hub.\25\
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\25\ See ISE Letter 2 and NYSE Arca Letter 2, supra note 5; see
also Amex Letter 2, BSE Letter 2, CBOE Letter 2, Nasdaq Letter 2,
and Phlx Letter 2, supra note 7.
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There are three defined order types under the Current Plan that its
participants could route through the Linkage Hub to limit trade-
throughs: orders represented by eligible market makers on behalf of
customers (``Principal Acting as Agent Orders'' or ``P/A Orders'');
\26\ orders for the principal accounts of market makers and specialists
(``Principal Orders''); \27\ and orders intended to satisfy trade-
through liabilities (``Satisfaction Orders'').\28\ Non-market-maker
broker-dealers do not have access to the Linkage Hub.
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\26\ Sections 2(16)(a) and 7(a)(ii)(A), (B) of the Current Plan.
\27\ Sections 2(16)(b) and 7(a)(ii)(C) of the Current Plan.
\28\ Sections 2(16)(c) and 7(a)(ii)(D) of the Current Plan.
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C. Proposed Plan
The Proposing Exchanges are now seeking approval of an alternative
linkage plan, the Proposed Plan. As described in more detail below, the
Proposed Plan would not require a central linkage mechanism akin to the
Current Plan's Linkage Hub, and would introduce certain new features to
linkages between options markets, including an Intermarket Sweep Order
(``ISO'') similar to that available for NMS stocks under Regulation
NMS.\29\
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\29\ See Securities Exchange Act Release No. 51808 (June 9,
2005), 70 FR 37496 (June 29, 2005) (File No. S7-10-04) (``NMS
Release''); 17 CFR 242.600 et seq.
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III. Discussion
As discussed above, in 1975, Congress directed the Commission,
through the enactment of Section 11A of the Act,\30\ to facilitate the
development of a national market system consistent with the objectives
of the Act. In particular, Section 11A(a)(3)(B) of the Act \31\
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.'' Rule 608 establishes the
procedures for filing, amending, and approving a national market system
plan. Approval of such a plan is conditioned upon a finding that the
proposed plan ``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.'' \32\
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\30\ 15 U.S.C. 78k-1.
\31\ 15 U.S.C. 78k-1(a)(3)(B).
\32\ 17 CFR 242.608.
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After careful review, the Commission has determined to approve the
Proposed Plan, pursuant to Section 11A(a)(3)(B) of the Act \33\ and
Rule 608 thereunder,\34\ with changes set forth herein as the
Commission has deemed necessary and appropriate.\35\ Specifically, the
Commission finds that changes to the Proposed Plan set forth herein are
necessary and appropriate in the public interest. The Commission
further finds that the Options Linkage Plan is in furtherance of the
purposes of the Act in that it requires the protection of the best
priced displayed quotes and avoidance and reconciliation of locked and
crossed markets, and thus is necessary and 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.\36\
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\33\ 15 U.S.C. 78k-1(a)(3)(B).
\34\ 17 CFR 242.608.
\35\ The Commission has modified the Proposed Plan to amend
Section 7 of the Proposed Plan relating to the implementation date
of the plan (see infra notes 140-143 and accompanying text).
\36\ 17 CFR 242.608(b)(2).
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The Commission believes that Proposed Plan's decentralized
structure will allow the Proposing Exchanges to take advantage of new
technology that allow for efficient routing and executions. The
Proposed Plan will give the Proposing Exchanges greater flexibility for
order handling as it would allow the exchanges to utilize private
linkages, instead of requiring each Proposing Exchange to connect to,
and participate in the maintenance of, a centralized hub. In addition,
the Proposed Plan would permit the use of ISOs in the options markets.
As such, the Proposed Plan would allow the Proposing Exchanges to move
towards the market structure approved by the Commission for NMS stocks
under Regulation NMS.\37\ The Commission believes that the Options
Linkage Plan will allow the Proposing Exchanges to update the way in
which they accomplish effective quote protection and locked and crossed
market reconciliation. For the reasons described above, the Commission
believes that these provisions of the Options Linkage Plan will provide
benefits to the options markets, including the Proposing Exchanges and
market participants generally.
---------------------------------------------------------------------------
\37\ See supra note 29.
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In its comment letter on the Proposed Plan, Citadel referenced the
comments it made with regard to access fees in the options markets in
its Petition for Rulemaking.\38\ There, Citadel encouraged the
Commission to institute a rulemaking proceeding to limit the fees that
options exchanges may charge non-members to obtain access to
quotations.\39\ Commission staff is currently considering Citadel's
petition.
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\38\ See Citadel Letter, supra note 9.
\39\ See Petition for Rulemaking, supra note 9.
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A. Order Protection
1. Requirement of Reasonable Policies and Procedures
The Options Linkage Plan requires each Participant \40\ to
establish,
[[Page 39365]]
maintain, and enforce written policies and procedures as approved by
the Commission that are reasonably designed to prevent Trade-Throughs
in that Participant's market in Eligible Options Classes.\41\ A
``Trade-Through'' \42\ is defined as a transaction in an option series,
either as principal or agent, at a price that is lower than a Protected
Bid or higher than a Protected Offer. A ``Protected Bid'' or a
``Protected Offer'' \43\ means a bid or offer in an option series that
is displayed by an Eligible Exchange, is disseminated pursuant to the
OPRA Plan, and is the Best Bid or Best Offer of an Eligible Exchange. A
``Best Bid'' or ``Best Offer'' \44\ means the highest bid price or the
lowest offer price communicated by a member of an Eligible Exchange to
any broker-dealer or to any customer at which such member is willing to
buy or sell, either as principal or agent.
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\40\ The Options Linkage Plan defines ``Participant'' to mean an
Eligible Exchange whose participation in the plan has become
effective pursuant to Section 3(c) of the Options Linkage Plan. See
Section 2(15) of the Options Linkage Plan. The Options Linkage Plan
defines ``Eligible Exchange'' to mean a national securities exchange
registered with the Commission in accordance with Section 6(a) of
the Act that, among other things, is a Participant Exchange in OCC
(as that term is defined in Section VII of the OCC by-laws) and is a
party to the OPRA Plan (as that term is described in Section I of
the OPRA Plan). ``OPRA Plan'' means the plan filed by the Options
Price Reporting Authority with the Commission pursuant to Section
11A(a)(1)(C)(iii) of the Act and approved by the Commission and
declared effective as of January 22, 1976, as from time to time
amended. See Section 2(14) of the Options Linkage Plan. For the
definitions of ``Trade-Through,'' ``Best Bid'' or ``Best Offer,''
``Locked Market,'' and ``Crossed Market,'' see infra notes 42, 44,
and 119 and accompanying texts.
\41\ Section 5(a)(i) of the Options Linkage Plan.
\42\ Section 2(21) of the Options Linkage Plan.
\43\ Section 2(17) of the Options Linkage Plan. Protected Bid
and Protected Offer, together are referred to herein as ``Protected
Quotation.'' See Section 2(18) of the Options Linkage Plan.
\44\ Sections 2(1) and 2(2) of the Options Linkage Plan.
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The Options Linkage Plan also requires each Participant to agree to
conduct surveillance of its market on a regular basis to ascertain the
effectiveness of the policies and procedures to prevent Trade-Throughs
and to take prompt action to remedy deficiencies in such policies and
procedures.\45\
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\45\ Section 5(a)(ii) of the Options Linkage Plan.
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As is the case currently for NMS stocks under Regulation NMS,\46\
the Commission believes the Options Linkage Plan's policies and
procedures-based approach to preventing Trade-Throughs in options is in
the public interest, appropriate for the protection of investors and
the maintenance of fair and orderly markets, and is consistent with
Section 11A(a)(1)(C) of the Act.\47\ The requirement in Section 5(a)(i)
of the Options Linkage Plan is virtually identical to the requirement
in Rule 611(a) of Regulation NMS. The Commission expects the
Participants in the Options Linkage Plan will establish, maintain, and
enforce written policies and procedures comparable to those
established, maintained and enforced by the market centers subject to
Rule 611(a). The Commission believes that a policies and procedures-
based approach to preventing Trade-Throughs in options is reasonable
given the increasingly high volume of trading in options, and the
latencies and other discrepancies in the delivery and receipt of
quotation data. The requirement of written policies and procedures, as
well as the responsibility assigned to Participants to regularly
surveil to ascertain the effectiveness of their procedures and take
prompt remedial steps, is designed to achieve the objective of
eliminating all Trade-Throughs that reasonably can be prevented, while
also recognizing the inherent difficulties of eliminating Trade-Through
transactions that, despite a Participant's reasonable efforts, may
occur.
---------------------------------------------------------------------------
\46\ See Rule 611(a) of Regulation NMS (17 CFR 242.611(a)).
\47\ 15 U.S.C. 78k-1(a)(1)(C).
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The Commission believes that each Participant's policies and
procedures must enable it to monitor, on a real-time basis, the
Protected Quotations displayed by Eligible Exchanges so as to determine
the prices at which the Participant can and cannot execute trades. In
addition, the Commission believes that a Participant's policies and
procedures must establish objective standards and parameters governing
its use of the exceptions set forth in Section 5(b) of the Options
Linkage Plan, discussed below, and expects each Participant's order-
handling and trading systems to be programmed in accordance with these
policies and procedures. Finally, the Participant must take such steps
as are necessary to enable it to enforce its policies and procedures
effectively. For example, the Commission believes that Participants
will need to establish procedures such as regular exception reports to
evaluate their trading and order-routing practices. The Commission
believes that each Participant Exchange will need to examine such
reports to affirm that its policies and procedures have been followed
by its personnel and properly coded into its systems and, if not, to
promptly identify the reasons and take remedial action.\48\
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\48\ See NMS Release at 37535, supra note 29.
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Participants' obligations under the Options Linkage Plan to
maintain and enforce policies and procedures reasonably designed to
prevent Trade-Throughs is reinforced by the Options Linkage Plan's
explicit assignment of responsibility to Participants to surveil to
ascertain the effectiveness of their policies and procedures.
Participants cannot merely establish policies and procedures that may
be reasonable when created and assume that such policies and procedures
continue to satisfy the requirements of the Options Linkage Plan.
Rather, the Commission believes that Participants must regularly assess
the continuing effectiveness of their procedures and take prompt action
when needed to remedy deficiencies. In particular, Participants must
engage in regular surveillance to determine whether Trade-Throughs are
occurring without an applicable exception and whether they have failed
to implement and maintain policies and procedures that would have
reasonably prevented such Trade-Throughs. Further, this requirement is
an important element of a Participant's obligations under Rule 608(c)
of Regulation NMS, which require that each self-regulatory
organization, absent reasonable justification or excuse, enforce
compliance with any national market system plan by its members and
persons associated with its members.\49\
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\49\ 17 CFR 242.608(c).
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2. Exceptions to Trade-Throughs
The Options Linkage Plan provides exceptions for certain
transactions from the prohibition against Trade-Throughs.\50\ The
Options Linkage Plan also provides that, if a Participant relies on an
exception, it would be required to establish, maintain, and enforce
written policies and procedures reasonably designed to assure
compliance with the terms of the exception.\51\ Except for the proposed
exception for stopped orders and price improvement,\52\ the exceptions
in the Options Linkage Plan correspond to trade-through exceptions
found in either the Current Plan or in Regulation NMS.\53\ The Options
Linkage Plan includes the following exceptions from the prohibition
against Trade-Throughs: system issues; \54\ trading rotations; \55\
crossed markets; \56\ intermarket sweep orders; \57\ quote flickering;
\58\ non-firm quotes; \59\ complex trades; \60\ customer stopped
orders; \61\ stopped orders and price
[[Page 39366]]
improvement; \62\ and benchmark trades.\63\
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\50\ See Proposed Plan Notice at 15012, supra note 8, for a more
detailed description of the proposed Trade-Through exceptions.
\51\ Section 5(a)(i) of the Options Linkage Plan.
\52\ Section 5(b)(x) of the Options Linkage Plan.
\53\ Rule 611 of Regulation NMS, known also as the Order
Protection Rule, governs trade-through liability for NMS Stocks. See
17 CFR 242.611.
\54\ Section 5(b)(i) of the Options Linkage Plan.
\55\ Section 5(b)(ii) of the Options Linkage Plan.
\56\ Section 5(b)(iii) of the Options Linkage Plan. For the
definition of a ``Crossed Market,'' see infra note 119 and
accompanying text.
\57\ Section 5(b)(iv)-(v) of the Options Linkage Plan.
\58\ Section 5(b)(vi) of the Options Linkage Plan.
\59\ Section 5(b)(vii) of the Options Linkage Plan.
\60\ Section 5(b)(viii) of the Options Linkage Plan.
\61\ Section 5(b)(ix) of the Options Linkage Plan.
\62\ Section 5(b)(x) of the Options Linkage Plan.
\63\ Section 5(b)(xi) of the Options Linkage Plan.
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The Commission believes these exceptions will permit a workable
intermarket price protection structure for the options market, and are
consistent with the principle of price protection. As discussed below,
the Commission finds that each of these exceptions is in the public
interest, appropriate for the protection of investors and the
maintenance of fair and orderly markets,\64\ and believes each assures
fair competition among exchange markets, consistent with Section
11A(a)(1)(C) of the Act.\65\
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\64\ 17 CFR 242.608(b)(2).
\65\ 15 U.S.C. 78k-1(a)(1)(C).
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System Issues: \66\ This exception, similar to an exception in the
Current Plan, permits a Participant to trade through a Protected
Quotation if the Eligible Exchange displaying the Protected Quotation
that was traded through was experiencing a failure, material delay, or
malfunction of its systems or equipment when the Trade-Through
occurred. This exception gives Participants a ``self-help'' remedy if
another Eligible Exchange repeatedly fails to provide an immediate
response to incoming orders attempting to access its quotes. As the
Commission stated in approving a parallel exception for stocks under
Regulation NMS, the Eligible Exchange receiving an order can only be
held responsible for its own turnaround time (i.e., from the time it
first received an order to the time it transmits a response to the
order). Accordingly, the routing exchange will be required to develop
policies and procedures that allow for any potential delays in
transmission not attributable to the receiving exchange. This exception
also covers any failure or malfunction of an Eligible Exchange's
systems or equipment, as well as any material delay.\67\
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\66\ Section 5(b)(i) of the Options Linkage Plan.
\67\ See NMS Release at 37535, supra note 29.
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Participants will need to establish specific objective parameters
governing their use of this ``self-help'' exemption as part of their
reasonable policies and procedures. The Commission believes, for
example, a single failure to respond within one second generally will
not justify future bypassing of another Eligible Exchange's quotations.
Many failures to respond within one second in a short time period, in
contrast, clearly will warrant use of the exception. The Commission
believes that a Participant making use of this exception must notify
the non-responding Eligible Exchange immediately after (or at the same
time as) electing this exception pursuant to reasonable and objective
standards contained in its policies and procedures in order to alert
the non-responding Eligible Exchange that the Participant intends to
make use of this exception with respect to the non-responding Eligible
Exchange's quotes.\68\
---------------------------------------------------------------------------
\68\ Id.
---------------------------------------------------------------------------
The Commission believes that a Participant should be entitled to
bypass an away market's quotations if that market fails to respond to
incoming orders attempting to access a displayed quote. The Commission
believes that this exception will provide Participants with the
necessary flexibility for dealing with problems that occur on an away
market during the trading day. Further, the Commission finds that this
exception is in the public interest, appropriate for the protection of
investors and the maintenance of fair and orderly markets,\69\ and
believes it assures fair competition among exchange markets, consistent
with Section 11A(a)(1)(C) of the Act.\70\
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\69\ 17 CFR 242.608(b)(2).
\70\ 15 U.S.C. 78k-1(a)(1)(C).
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Trading Rotations: \71\ This exception, which is carried over from
the Current Plan \72\ and similar to an exception available for NMS
stocks under Regulation NMS,\73\ permits a Participant to trade through
a Protected Quotation disseminated by an Eligible Exchange during a
trading rotation. Options exchanges use a trading rotation to open an
option for trading or reopen an option after a trading halt.
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\71\ Section 5(b)(ii) of the Options Linkage Plan.
\72\ See Section 8(c)(iii)(E) of the Current Plan.
\73\ See Rule 611(b)(3) of Regulation NMS under the Act (17 CFR
242.611(b)(3)).
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As noted by the Participants, the trading rotation is effectively a
single price auction to price the option,\74\ and there are no
practical means to include prices on other exchanges in that
auction.\75\ As such, the Commission emphasizes that the exception will
not permit a Participant to declare a trading halt merely to be able to
circumvent the operation of the Options Linkage Plan's Trade-Through
provisions upon reopening; instead, the Commission believes a
Participant must conduct, pursuant to its rules, a formalized and
transparent process for executing orders during reopening after a
trading halt that involves the queuing and ultimate execution of
multiple orders at a single equilibrium price. In addition, a
Participant must have formally declared a trading halt pursuant to its
rules. Therefore, the Commission finds that it is reasonable to include
this as an exception to the general prohibition on Trade-Throughs as it
is in the public interest, appropriate for the protection of investors
and the maintenance of fair and orderly markets,\76\ and believes it
assures fair competition among exchange markets, consistent with
Section 11A(a)(1)(C) of the Act.\77\
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\74\ See ISE Letter 2 and NYSE Arca Letter 2, supra note 5; see
also Amex Letter 2, BSE Letter 2, CBOE Letter 2, Nasdaq Letter 2,
and Phlx Letter 2, supra note 7.
\75\ See ISE Letter 2 and NYSE Arca Letter 2, supra note 5; see
also Amex Letter 2, BSE Letter 2, Nasdaq Letter 2, and Phlx Letter
2, supra note 7.
\76\ 17 CFR 242.608(b)(2).
\77\ 15 U.S.C. 78k-1(a)(1)(C).
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Crossed Markets: \78\ This exception permits a Participant to trade
through a Protected Quotation when the market is crossed, and
corresponds to an exception for NMS stocks under Regulation NMS.\79\ A
Crossed Market occurs when a Protected Bid is higher than a Protected
Offer in a given options class. The Commission believes that it is
appropriate to permit executions without regard to Trade-Throughs in a
Crossed Market because allowing such transactions should permit the
market to quickly resolve any unintentional crosses. For the foregoing
reasons, the Commission finds that this exception is in the public
interest, appropriate for the protection of investors and the
maintenance of fair and orderly markets,\80\ and believes it assures
fair competition among exchange markets, consistent with Section
11A(a)(1)(C) of the Act.\81\
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\78\ Section 5(b)(iii) of the Options Linkage Plan.
\79\ See Rule 611(b)(4) of Regulation NMS (17 CFR
242.611(b)(4)).
\80\ 17 CFR 242.608(b)(2).
\81\ 15 U.S.C. 78k-1(a)(1)(C).
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Intermarket Sweep Orders: \82\ The Options Linkage Plan includes
two exceptions from the prohibition against Trade-Throughs for certain
transactions involving ISOs. These two exceptions correspond to the
exceptions relating to ISOs for NMS stocks under Regulation NMS.\83\
First, the Options Linkage Plan permits a Participant to execute orders
marked as ISOs even when the Participant is not at the national best
bid or offer (``NBBO''). Second, a Participant is permitted to execute
a transaction when such transaction is not at the NBBO, provided it
simultaneously ``sweeps'' all better priced Protected Quotations by
routing an ISO to execute against the full displayed size of any
Protected Quotation that was traded through.
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\82\ Section 5(b)(iv) and (v) of the Options Linkage Plan.
\83\ See Rule 611(b)(5) and (6) of Regulation NMS (17 CFR
242.611(b)(5) and (6)).
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[[Page 39367]]
An ISO is defined as a limit order for an options series that, when
routed to an Eligible Exchange, is identified as an Intermarket Sweep
Order and, simultaneously with the routing of the order, one or more
additional orders, as necessary, are routed to execute against the full
displayed size of any Protected Bid, in the case of a limit order to
sell, or any Protected Offer, in the case of a limit order to buy, for
the options series with a price that is superior to the limit price of
the order.\84\ Any such additional orders would also be marked as ISOs.
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\84\ Section 2(9) of the Options Linkage Plan.
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The availability of ISOs will allow the Participants to access
multiple price levels simultaneously displayed on the same or multiple
markets, without violating the prohibition against Trade-Throughs. As
the Commission stated with respect to ISOs for stocks under Regulation
NMS, the Commission believes that allowing a Participant to immediately
execute an order identified as an ISO when that exchange is not at the
NBBO is fully consistent with the principle of protecting the best
displayed prices because the exception is premised on the condition
that the market participant sending the ISO has already attempted to
access all better-priced Protected Quotations up to their displayed
size. Consequently, there is no reason why a Participant that receives
an ISO while displaying an inferior-priced quotation should be required
to delay an execution of the order.\85\ This exception should help to
ensure more efficient and faster executions.
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\85\ See NMS Release at 37523, supra note 29.
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The second ISO Trade-Through exception, under subparagraph (b)(v)
of Section 5 of the Options Linkage Plan, should benefit market
participants in their ability to handle orders efficiently. For
example, market participants should be able to use this exception to
more efficiently execute block trades one or more minimum price
increments away from the NBBO. So long as ISOs are simultaneously
routed to execute against better-priced Protected Quotation on other
markets, the block order could be executed contemporaneously with the
routing of the ISOs.
The Commission notes that Section 5(c) of the Options Linkage Plan
requires Participants to take reasonable steps to establish that ISOs
are properly routed in an attempt to execute against all applicable
Protected Quotations.
For the reasons stated above, the Commission finds that the
exception from Trade-Through liability when an exchange or market
participants sends an ISO is in the public interest, appropriate for
the protection of investors and the maintenance of fair and orderly
markets,\86\ and believes it assures fair competition among exchange
markets, consistent with Section 11A(a)(1)(C) of the Act.\87\
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\86\ 17 CFR 242.608(b)(2).
\87\ 15 U.S.C. 78k-1(a)(1)(C).
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Quote Flickering: \88\ Subparagraph (b)(vi) of Section 5 of the
Options Linkage Plan sets forth an exception for flickering quotations,
and corresponds to an exception for NMS stocks under Regulation
NMS.\89\ It excepts a transaction if the Eligible Exchange displaying
the Protected Quotation that was traded through had displayed, within
one second prior to execution of the Trade-Through, a Best Bid or Best
Offer, as applicable, for the options series with a price that was
equal or inferior to the price of the Trade-Through transaction.
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\88\ Section 5(b)(vi) of the Options Linkage Plan.
\89\ See Rule 611(b)(8) of Regulation NMS (17 CFR
242.611(b)(8)).
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As the Commission stated with respect to the similar exception for
stocks under Regulation NMS,\90\ this exception thereby provides a
``window'' to address false indications of Trade-Throughs that in
actuality are attributable to rapidly moving quotations. It should also
reduce the number of instances in which a Participant must alter its
normal trading procedures and route orders to other trading centers to
comply with the Options Linkage Plan. The exception is thereby intended
to promote more workable intermarket price protection. The Commission
finds it is in the public interest, appropriate for the protection of
investors and the maintenance of fair and orderly markets,\91\ and
believes it assures fair competition among exchange markets, consistent
with Section 11A(a)(1)(C) of the Act.\92\
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\90\ See NMS Release at 37536, supra note 29.
\91\ 17 CFR 242.608(b)(2).
\92\ 15 U.S.C. 78k-1(a)(1)(C).
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Non-Firm Quotes: \93\ This exception, which is carried over from
the Current Plan,\94\ permits a Participant to trade through a
Protected Quotation that was ``Non-Firm.'' \95\ ``Non-Firm'' is defined
to mean, with respect to Quotations in an Eligible Options Class, that
members of a Participant are relieved of their obligations under that
Participant's firm quote rule in that Eligible Options Class.\96\
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\93\ Section 5(b)(vii) of the Options Linkage Plan.
\94\ See Section 8(c)(iii)(C) of the Current Plan.
\95\ See Section 2(11) of the Options Linkage Plan.
\96\ The Commission notes that, when quotations in an Eligible
Options Class are Non-Firm, exchange rules require the exchange to
provide notice that its quotations are Non-Firm by appending an
indicator to its quotations. See, e.g., CBOE Rule 43.14(b) and NYSE
Arca Rule 6.86(d)(1)(C).
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The Commission believes that Participants should not be required to
protect the price of an away market when that market identifies its
quotes as ``Non-Firm.'' The Commission finds that this exception is in
the public interest, appropriate for the protection of investors and
the maintenance of fair and orderly markets,\97\ and believes it
assures fair competition among exchange markets, consistent with
Section 11A(a)(1)(C).\98\
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\97\ 17 CFR 242.608(b)(2).
\98\ 15 U.S.C. 78k-1(a)(1)(C).
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Complex Trades: \99\ This exception carries forward the complex
trade exception in Section 8(c)(iii)(G) of the Current Plan \100\ and
permits a Participant to trade through a Protected Quotation if the
transaction was part of a ``complex trade.'' The definition of
``complex trade'' would be implemented through rules adopted by the
Participants, which would be subject to notice, comment, and Commission
review pursuant to the Section 19(b) rule filing process.
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\99\ Section 5(b)(viii) of the Options Linkage Plan.
\100\ Section 8(c)(iii)(G) of the Current Plan.
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Complex trades, such as those submitted by market participants
under the Proposing Exchanges complex order mechanisms,\101\ are
composed of multiple transactions effected at a net price. As the
Proposing Exchanges state,\102\ it is not always practical to require
each leg to be transacted at a price that does not constitute a Trade-
Through, and the Commission believes that permitting an exception for
transactions effected as a portion of a complex trade is appropriate.
By narrowly crafting the definition of complex trades in each
Participants' rules,\103\ the Commission believes that this exception
will not undercut the general Trade-Through protections of the Options
Linkage Plan, and finds it is in the public interest, appropriate for
the protection of investors and the maintenance of fair and orderly
markets,\104\ and believes it assures fair competition among exchange
markets, consistent with Section 11A(a)(1)(C).\105\
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\101\ See, e.g., ISE Rule 722.
\102\ See ISE Letter 2 and NYSE Arca Letter 2, supra note 5; see
also Amex Letter 2, BSE Letter 2, CBOE Letter 2, Nasdaq Letter 2,
and Phlx Letter 2, supra note 7.
\103\ All changes to rules of national securities exchanges are
subject to notice, comment and Commission review pursuant to Section
19(b) of the Act. 15 U.S.C. 78s(b).
\104\ 17 CFR 242.608(b)(2).
\105\ 15 U.S.C. 78k-1(a)(1)(C).
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[[Page 39368]]
Customer Stopped Orders: \106\ This exception permits a Participant
to trade through a Protected Quotation if the trade executed a
``stopped order.'' The exception requires that the ``stopped order'' be
for the account of a Customer; \107\ that the Customer agreed to the
specified price on an order-by-order basis; and that the price of the
Trade-Through was, for a stopped buy order, lower than the national
Best Bid in the options series at the time of execution, or, for a
stopped sell order, higher than the national Best Offer in the options
series at the time of execution. This exception corresponds to the
customer stopped order exception under Regulation NMS.\108\
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\106\ Section 5(b)(ix) of the Options Linkage Plan.
\107\ ``Customer'' would be defined to mean an individual or
organization that is not a ``Broker/Dealer.'' See Section 2(5) of
the Options Linkage Plan.
\108\ See Rule 611(b)(9) of Regulation NMS (17 CFR
242.611(b)(9)).
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The Commission recognizes that the use of stopped orders is a
valuable tool, particularly for the execution of large orders.\109\ The
Commission believes that this narrowly-drawn exception would give
market participants the ability to execute large Customer orders over
time at a price agreed upon by a Customer, even though the price of the
option may change before the order is executed in its entirety, without
undermining the general principles of price protection under the
Options Linkage Plan. For these reasons, the Commission finds that this
exception is in the public interest, appropriate for the protection of
investors and the maintenance of fair and orderly markets,\110\ and
assures fair competition among exchange markets, consistent with
Section 11A(a)(1)(C) of the Act.\111\
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\109\ See NMS Release at 37527, supra note 29.
\110\ 17 CFR 242.608(b)(2).
\111\ 15 U.S.C. 78k-1(a)(1)(C).
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Stopped Orders and Price Improvement: \112\ This exception permits
a Participant to trade through a Protected Quotation if the transaction
that constituted the Trade-Through was the execution by a Participant
of an order that is stopped at a price that did not constitute a Trade-
Through at the time of the stop. This exception allows a Participant to
seek price improvement for an order, even if the market moves in the
interim, and the transaction ultimately is effected at a price that
would trade through the then currently-displayed market. The rules of
several of the Proposing Exchanges currently contain provisions
relating to price improvement mechanisms.\113\
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\112\ Section 5(b)(x) of the Options Linkage Plan.
\113\ See, e.g., Securities Exchange Act Release No. 50819
(December 8, 2004), 69 FR 75093 (December 15, 2004) (SR-ISE-2003-06)
(approving rules implementing ISE's Price Improvement Mechanism
under ISE Rule 723).
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These price improvement mechanisms offer price improvement to
orders received by the exchange during a specified period of time
(``auction''). During this auction period, the NBBO could move from
where it was when the order was received. However, the exchange is only
required to guarantee a price no worse than the NBBO at the time the
order was received. Thus, following the auction, an execution could
result in a Trade-Through if the NBBO improves from the time the order
was received although, had the order been executed at the time of
receipt, the execution would not have resulted in a Trade-Through.
This exception would allow a Participant to seek price improvement
for an order, even if the market moves in the interim, and the
transaction ultimately is effected at a price that would trade through
the then currently-displayed market. By allowing this exception, the
Commission expects that Participants would be able to continue to use
price improvement mechanisms, thereby offering market participants
potentially better-priced executions. The Commission finds that this
exception is in the public interest, appropriate for the protection of
investors and the maintenance of fair and orderly markets,\114\ and
believes it assures fair competition among exchange markets, consistent
with Section 11A(a)(1)(C) of the Act.\115\
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\114\ 17 CFR 242.608(b)(2).
\115\ 15 U.S.C. 78k-1(a)(1)(C).
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Benchmark Trades: \116\ This exception permits a Participant to
trade through a Protected Quotation if the trade was executed at a
price not based directly or indirectly on the quoted price of an
options series at the time of execution and for which the material
terms were not reasonably determinable at the time of the commitment to
make the trade.
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\116\ Section 5(b)(xi) of the Options Linkage Plan.
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This exception allows a ``benchmark order'' and corresponds to an
exception for NMS stocks under Rule 611 of Regulation NMS.\117\ A
common example of a benchmark order for NMS stocks is a volume-weighted
average price, or ``VWAP,'' order. The Commission notes that none of
the Proposing Exchanges currently permit these types of options trades,
and any Participant seeking to make use of this exception would be
required to submit a proposed rule change which would be subject to
notice, comment and Commission review under Section 19(b) of the Act.
The Commission finds that this exception is in the public interest,
appropriate for the protection of investors and the maintenance of fair
and orderly markets, and believes it assures fair competition among
exchange markets, consistent with Section 11A(a)(1)(C) of the Act.\118\
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\117\ See Rule 611(b)(7) of Regulation NMS (17 CFR
242.611(b)(7)).
\118\ 15 U.S.C. 78k-1(a)(1)(C).
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B. Locked and Crossed Markets
The Options Linkage Plan also addresses Locked and Crossed
Markets.\119\ The requirements in the Options Linkage Plan relating to
Locked and Crossed Markets are virtually identical to those applicable
to market centers for NMS stock under Regulation NMS.\120\
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\119\ Section 6 of the Options Linkage Plan. A ``Locked Market''
is defined as a quoted market in which a Protected Bid is equal to a
Protected Offer in a series of an Eligible Options Class. See
Section 2(10) of the Options Linkage Plan. A ``Crossed Market'' is
defined as a quoted market in which a Protected Bid is higher than a
Protected Offer in a series of an Eligible Options Class. See
Section 2(4) of the Options Linkage Plan.
\120\ See Rule 610(d) of Regulation NMS (17 CFR 242.610(d)).
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Specifically, the Options Linkage Plan requires each Participant to
establish, maintain, and enforce written rules that require their
members reasonably to avoid displaying Locked and Crossed Markets.\121\
Participants would also be required to establish, maintain, and enforce
written rules reasonably designed to assure the reconciliation of
Locked and Crossed Markets.\122\ Finally, the Options Linkage Plan
would provide that Participants must establish, maintain, and enforce
written rules that prohibit their members from engaging in a pattern or
practice of displaying Locked and Crossed Markets, subject to
exceptions as may be contained in the Participants' rules, as approved
by the Commission.\123\
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\121\ Section 6(a) of the Options Linkage Plan.
\122\ Section 6(b) of the Options Linkage Plan.
\123\ Section 6(c) of the Options Linkage Plan. The Commission
notes that the proposed rule changes relating to all necessary
implementing rules of the Participants, including those required by
Section 6 of the Options Linkage Plan, would be subject to notice,
comment, and Commission review pursuant to Section 19(b) of the Act.
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The Commission recognizes that Section 6 of the Options Linkage
Plan, by restricting Locked Markets, can prohibit the display of an
order that would otherwise have been displayed and reduced the quoted
spread to zero. However, as the Commission stated with respect to
locked markets for stocks under Regulation NMS, the
[[Page 39369]]
Commission believes that Locked Markets may not actually represent two
market participants willing to buy and sell at the same price. Instead,
a locking market participant may not truly be willing to trade at the
displayed locking price, but chooses to lock rather than execute
against the already-displayed quotation to receive a liquidity rebate.
The Commission believes that giving priority to the first-displayed
Protected Bid or Protected Offer, particularly when it includes a
public customer's order, will encourage price discovery and contribute
to fair and orderly markets.\124\
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\124\ See NMS Release at 37547, supra note 29.
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The Options Linkage Plan is designed to ensure that the display of
locked and crossed markets would be restricted, while also recognizing
that locked and crossed markets do occur accidentally and cannot always
be avoided. Thus, the Options Linkage Plan requires that the
Participants have written rules that are reasonably designed to assure
the reconciliation of any lock or cross. Further, the Options Linkage
Plan expressly prohibits a pattern or practice of locking or crossing
away markets.
In addition, the Options Linkage Plan would allow exceptions to its
general Locked and Crossed Markets provision as might be contained in a
given Participant's rules. As with all proposed rule changes of
national securities exchanges, such rule changes would be subject to
notice, comment and Commission review under Section 19(b)(1) of the
Act.\125\ The Commission believes that these provisions are designed to
ensure that the display of Locked and Crossed Markets will be limited
and that any such display will be promptly reconciled.
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\125\ 15 U.S.C. 78s(b)(1).
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For the reasons stated above, the Commission finds that the Options
Linkage Plan's provisions relating to Locked and Crossed Markets are in
the public interest, appropriate for the protection of investors and
the maintenance of fair and orderly markets,\126\ and believes they
assure fair competition among exchange markets, consistent with Section
11A(a)(1)(C).\127\
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\126\ 17 CFR 242.608(b)(2).
\127\ 15 U.S.C. 78k-1(a)(1)(C).
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C. Joining the Proposed Plan
Any national securities exchange would be eligible to become a
Participant by executing a copy of the Options Linkage Plan and
providing each Participant with a copy of such executed Options Linkage
Plan \128\ if it is: (1) Registered with the Commission in accordance
with Section 6(a) of the Act; (2) a Participant Exchange in OCC; \129\
and (3) a party to the OPRA Plan.\130\ Further, any such national
securities exchange wishing to become a Participant would be required
to file an amendment to the Options Linkage Plan by executing a copy of
the Options Linkage Plan and filing such executed Options Linkage Plan
to the Commission.\131\ Such amendment would be effective when the
amendment is approved by the Commission or otherwise becomes effective
pursuant to Section 11A of the Act and Rule 608 thereunder.\132\ The
Commission finds that this process for joining the Options Linkage Plan
is in the public interest,\133\ and believes it is consistent with
Section 11A(a)(1)(C) because it is designed to ensure that reasonable
procedures are in place to permit additional exchanges to also
participate in the Options Linkage Plan.\134\
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\128\ Section 3(c) of the Options Linkage Plan.
\129\ For a definition of a ``Participant Exchange,'' see
Section VII of the OCC by-laws.
\130\ For more information on who is a party to the OPRA Plan,
see Section I of the OPRA Plan.
\131\ Section 4(b) of the Options Linkage Plan.
\132\ Id. These requirements are identical to those contained in
the Current Plan. See Sections 4(c)(i) and 5(c) of the Current Plan.
The Current Plan also requires that an eligible exchange pay a fee
to join the Current Plan. See Section 4(c)(i)(iv) of the Current
Plan. The Options Linkage Plan does not require an Eligible Exchange
to pay a fee to join the Options Linkage Plan.
\133\ 17 CFR 242.608(b)(2).
\134\ 15 U.S.C. 78k-1(a)(1)(C).
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D. Withdrawal From the Proposed Plan
Any Participant would be able to withdraw from the Options Linkage
Plan at any time by providing not less than 30 days' prior written
notice to each of the other Participants of such intent to
withdraw.\135\ To withdraw, such Participant also would be required to
effect an amendment to the Options Linkage Plan by submitting such
amended Options Linkage Plan to the Commission for approval.\136\ In
submitting the amended Options Linkage Plan to the Commission, the
Participant proposing to withdraw from the Options Linkage Plan would
be required to state how the Participant plans to accomplish, by
alternate means, the goal of the Options Linkage Plan regarding
limiting Trade-Throughs of prices on other exchanges trading the same
options classes.\137\ Such withdrawal from the Options Linkage Plan
would be effective when the amendment is approved by the Commission or
otherwise becomes effective pursuant to Section 11A of the Act and Rule
608 thereunder. Upon the effectiveness of such withdrawal, the
withdrawing Participant would have no further rights or obligations
under the Options Linkage Plan.
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\135\ Section 3(d) of the Options Linkage Plan.
\136\ Section 4(c) of the Options Linkage Plan.
\137\ Id. These requirements are identical to those contained in
the Current Plan. See Sections 4(d) and 5(c)(iii) of the Current
Plan.
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The Commission finds that these requirements for withdrawal from
the Options Linkage Plan are in the public interest, appropriate for
the protection of investors and the maintenance of fair and orderly
markets,\138\ and believes it assures fair competition among exchange
markets, consistent with Section 11A(a)(1)(C).\139\
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\138\ 17 CFR 242.608(b)(2).
\139\ 15 U.S.C. 78k-1(a)(1)(C).
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E. Implementation
The Proposed Plan states that the ``[Participants] shall implement
[the plan] * * * no later than February 27, 2009; provided that, unless
the [Commission] otherwise authorizes, the [Participants] shall not
implement [the plan] until all Eligible Exchanges either (1) have
become parties to [the plan] and the [Commission] has approved all
necessary implementing rules or (2) have developed the ability to
accept and execute incoming Intermarket Sweep Orders.'' \140\
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\140\ See Section 7 of the Proposed Plan.
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To provide clarity to market participants regarding the
implementation date of the plan, the Commission, after consultation
with
