Federal Register / Vol. 65, No. 187 / Tuesday, September 26, 2000 / Notices 57829

1Plaintiff believes that its Complaint states a

claim upon which relief may be granted.

Defendants disagree, but to resolve this matter and

for purposes of this Stipulation and the Final

Judgment only, have agreed not to contest that the

Complaint states a claim upon which relief may be

granted.

DEPARTMENT OF JUSTICE

Antitrust Division

United States v. American Stock

Exchange, LLC, et al., Proposed Order,

Stipulation and Competitive Impact

Statement

Notice is hereby given pursuant to the

Antitrust Procedures and Penalties Act,

15 U.S.C. 16(b)–(h), that a proposed

Order, Stipulation and Competitive

Impact Statement have been filed with

the United States District Court for the

District of Columbia in United States v.

American Stock Exchange, LLC, et al.,

Case No. 1:00CV02174.

The Complaint, filed on September

11, 2000, alleges that, starting sometime

in the early 1990s, the defendant

exchanges, the American Stock

Exchange, L.L.C., the Chicago Board

Options Exchange, Inc., the Pacific

Exchange, Inc. and the Philadelphia

Stock Exchange, Inc., agreed not to list

equity option classes that were listed

already on another exchange, in

violation of Section 1 of the Sherman

Act, as amended, 15 U.S.C. 1. The SEC

had determined in the late 1980s that

competition among exchanges for equity

options would benefit investors, in part

by narrowing spreads (the difference

between the best quoted price to buy

and the best quoted price to sell an

option), and repealed rules that had

previously limited the listing of certain

option classes to a single exchange. The

revised SEC rules prohibited the

exchanges from maintaining any rule,

stated policy, practice or interpretation

that precluded the multiple listing of

options. Rather than conform to the

directives of the SEC, the defendant

exchanges reached an understanding

between and among one another to

refrain from listing equity options

classes that were already listed on

another exchange. As a result, many

frequently traded equity options were

traded only on one exchange from the

early 1990s until at least the summer of

1999, thereby depriving investors of the

benefits of competition. The Complaint

also alleges that the exchanges enforced

the agreement in various ways,

including threatening and harassing

exchanges and market makers that

desired to multi-list options classes and

jointly limiting capacity of systems that

disseminate options information for the

purpose of deterring listing competition.

If entered by the Court, the proposed

Order, filed the same time as the

Complaint, prohibits the exchanges

from entering into, continuing, or

reinstating their listing agreement in any

form; from threatening, harassing, or

intimidating exchanges or exchange

members that seek to multi-list an

option class; and from maintaining rules

or policies that prohibit multiple listing.

The proposed Order requires the

exchanges to provide reports relating to

listing decisions and allegations of

harassment or intimidation to the

Department and to put antitrust

compliance procedures in place.

Copies of the Complaint, proposed

Order, Stipulation, and Competitive

Impact Statement are available for

inspection at the Department of Justice,

Washington, D.C. in Room 215, 325

Seventh Street, NW. (Telephone: (202)

514–2481) and at the Office of the Clerk

of the United States District Court for

the District of Columbia, Washington,

DC. Copies of any of these materials

may be obtained upon request and

payment of a copying fee.

Public comment is invited within the

statutory 60-day period commencing

with the publication of this notice. Such

comments, and responses thereto, will

be published in the Federal Register

and filed with the Court. Comments

should be directed to Nancy Goodman,

Chief, Computers and Finance Section,

Antitrust Division, U.S. Department of

Justice, 600 E. Street, NW., Room 9500,

Washington, DC 20530 (Telephone:

(202) 307–6200).

Mary Jean Moltenbrey,

Director of Civil Non-Merger Enforcement,

Antitrust Division.

Stipulation

It is stipulated by and between the

undersigned parties, by their respective

attorneys, as follows:

(1) The parties stipulate that a Final

Judgment in the form attached hereto

may be filed and entered by the Court,

upon the motion of any party or upon

the Court’s own motion, at any time

after compliance with the requirements

of the Antitrust Procedures and

Penalties Act, 15 U.S.C. 16, and without

further notice to any party or other

proceedings, provided that plaintiff has

not withdrawn its consent, which it may

do at any time before entry of the

proposed Final Judgment by serving

notice thereof on defendants and by

filing that notice with the Court.

(2) Defendants shall abide by and

comply with the provisions of the

proposed Final Judgment pending entry

of the Final Judgment by the Court, or

until expiration of time for all appeals

of any Court ruling declining entry of

the proposed Final Judgment, and shall,

from the date of the signing of this

Stipulation, comply with all the terms

and provisions of the proposed Final

Judgment as though the same were in

full force and effect as an order of the

Court.

(3) This Stipulation shall apply with

equal force and effect to any amended

proposed Final Judgment agreed upon

in writing by the parties and submitted

to the Court.

(4) For purposes of this Stipulation

and the accompanying Final Judgment

only, defendants stipulate that (i) the

Complaint states a claim upon which

relief may be granted under Section 1 of

the Sherman Act; 1 (ii) the Court has

jurisdiction over the subject matter of

this action and over each of the parties

hereto; and (iii) venue of this action is

proper in this Court.

(5) In the event plaintiff withdraws its

consent, as provided in paragraph (1)

above, or in the event that the Court

declines to enter the proposed Final

Judgment pursuant to this Stipulation,

the time has expired for all appeals of

any Court ruling declining entry of the

proposed Final Judgment, and the Court

has not otherwise ordered continued

compliance with the terms and

provisions of the proposed Final

Judgment, then the parties are released

from all further obligations under this

Stipulation, and the making of this

Stipulation shall be without prejudice to

any party in this or any other

proceeding.

(6) Defendants represent that the

undertakings ordered in the proposed

Final Judgment can and will be

satisfied, and that defendants will not

later raise claims of hardship or

difficulty as grounds for asking the

Court to modify any of the undertakings

contained therein.

Dated: September 6, 2000.

For Plaintiff United States of America

Joel I. Klein,

Assistant Attorney General.

John M. Nannes,

Deputy Assistant Attorney General.

Mary Jean Moltenbrey,

Director of Civil Non-Merger Enforcement.

Nancy M. Goodman,

Chief, Computers & Finance Section.

George S. Baranko,

D.C. Bar No. 288407.

John D. Worland, Jr.,

D.C. Bar No. 427797.

John H. Chung, Molly L. DeBusschere,

Catherine E. Fazio, Richard L. Irvine, Joshua

H. Soven,

Attorneys, Computers & Finance Section,

U.S. Department of Justice, Antitrust

57830 Federal Register / Vol. 65, No. 187 / Tuesday, September 26, 2000 / Notices

Division, 600 E. Street, N.W., Suite 9500,

Washington, D.C. 20530, (202) 307–6200.

Date Signed: September 6, 2000.

For Defendant American Stock Exchange,

LLC.:

Shepard Goldfein, Esq.,

Skadden Arps, Slate, Meagher & Flom LLP,

Four Times Square, New York, NY 10036,

(212) 735–3620.

Date Signed: September 6, 2000.

For Defendant Chicago Board Options

Exchange, Incorporated:

Mark C. Schechter, Esq.,

Howery, Simon, Arnold & White, 1299

Pennsylvania Ave., N.W.,Washington, DC

20004–2402, (202) 383–6890.

Date Signed: September 7, 2000

For Defendant Pacific Exchange, Inc.:

Bruce Coolidge, Esq.,

Wilmer, Cutler & Pickering, 2445 M Street,

N.W., Washington, DC 20037, (202) 663–

6000.

Date Signed: September 7, 2000.

For Defendant Philadelphia Stock

Exchange, Inc.:

Jonathan M. Rich, Esq.,

Morgan, Lewis & Bockius LLP, 1800 M Street,

N.W., Washington, DC 20036–5869, (202)

467–7433.

Date Signed: September 6, 2000.

Final Judgment

Plaintiff, United States of America,

filed its complaint on September 11,

2000. Plaintiff and defendants, by their

respective attorneys, have consented to

the entry of this Final Judgment without

trail or adjudication of any issue of fact

or law. This Final Judgment shall not be

evidence against or an admission by any

party of any issue of fact or law.

Therefore, before the taking of any

testimony, without trail or adjudication

of any issue of fact or law herein and

upon consent of the parties hereto, it is

hereby Ordered, Adjudged and Decreed

that:

I. Jurisdiction

This Court has jurisdiction over the

subject matter of and the parties to this

action. The complaint states a claim

upon which relief may be granted under

Section 1 of the Sherman Act, 15 U.S.C.

1. Venue is proper in the District Court

for the District of Columbia.

II. Definitions

As used in this Final Judgment:

1. ‘‘Any’’ means one or more.

2. ‘‘Ask’’ means the quoted price at

which a person offers to sell an option.

3. ‘‘Authorized by SEC personnel’’

means (a) conduct that has been

explicitly described in the SEC in

writing, and about which the SEC has

stated, in a writing signed by a person

at the Director level or higher, that it has

no objection to such conduct or

otherwise approves it; or (b) conduct the

SEC has expressly requested by

undertaken in a writing signed by a

person at the Director level or higher.

4. ‘‘Bid’’ means the quoted price at

which a person offers to buy an option.

5. ‘‘Equity option’’ means an option

on the shares of a single underlying

corporate entity, and does not include

an option on an index of securities or

options on shares of exchange-traded

funds, such as index fund shares, Unit

Investment Trust shares or Portfolio

Depositary Receipts.

6. ‘‘Exchange’’ means any exchange in

the United States that is registered

under Section 6 of the Securities

Exchange Act, and that provides (or

begins to provide at any time during the

term of this Final Judgment or has

submitted an application to the SEC for

authority to begin to provide) a venue

(including an electronic venue) for

buying and selling options issued by the

OCC.

7. ‘‘List’’ means to certify to the OCC

that an option contract, option class or

option series meets applicable standards

for the purpose of buying or selling an

option contract, class or series.

8. ‘‘Market maker’’ means a person

who is registered with an exchange for

the purpose of buying or selling options

as a dealer or specialist on an exchange,

including a person acting as a specialist,

primary market maker or designated

market maker.

9. ‘‘Member’’ means a person,

partnership, corporation, or other

organization that has been granted

trading privileges on an exchange.

10. ‘‘OCC’’ means the Options

Clearing Corporation, each of its

successors, divisions, subsidiaries, and

affiliates, and all present officers,

directors, employees, agents,

consultants, or other persons acting for

or on behalf of any of them.

11. ‘‘Option’’ means a contract that

gives the holder the right either to buy

or sell a specified amount or value of a

particular underlying interest at a fixed

exercise price by exercising the option

before its specified expiration date.

12. ‘‘Option class’’ means all option

contracts of the same type (call or put)

and style covering the same underlying

interest.

13. ‘‘Option series’’ means all option

contracts of the same class having the

same unit of trading, expiration date,

and exercise price.

14. ‘‘Or’’ means and/or.

15. ‘‘SEC’’ means the United States

Securities and Exchange Commission.

16. ‘‘Spread’’ means the difference

between a bid and an ask for the same

option series at the same time.

17. ‘‘Trade’’ means the business of

buying or selling option contracts,

classes or series.

18. ‘‘Underlying interest’’ means any

of the following interests: equity

securities, stock indexes, government

debt securities, and foreign currencies.

III. Applicability

This Final Judgment applies to each

defendant and to each of its officers,

directors, governors, successors, and

assigns and to any employee or agent,

including exchange members of any

committee of defendant whose duties or

responsibilities include selecting option

classes to be listed, developing new

option products or surveillance,

enforcement or ensuring compliance

with laws and regulations, and applies

to all other persons in active concert or

participation with any of them who

shall have received actual notice of this

Final Judgment by personal service or

otherwise. Nothing in this Final

Judgment creates any rights for, or gives

standing to, any person not a party to

this action.

IV. Prohibited Conduct

A. Except as provided in Section V,

each defendant is enjoined and

restrained from, directly or indirectly:

(1) Agreeing with any other exchange

that any equity option class shall be

traded exclusively on any one exchange;

(2) Agreeing with any other exchange

to allocate trading of any equity option

class or classes between or among

exchanges; and

(3) Agreeing with any other exchange

to require, prevent, or limit the listing,

delisting or trading of any equity option

class.

B. Except as provided by Section V,

no defendant shall maintain any rule,

policy, practice, or interpretation that

directly prohibits, or that has a purpose

and an effect of indirectly prohibiting, it

from listing any equity option class

because that option class is listed on

another exchange.

C. Except as provided in Section V,

each defendant is enjoined and

restrained from threatening to retaliate,

retaliating against, harassing or

intimidating any exchange or any

member of any exchange because it:

(1) Proposes or begins to list or trade

any equity option class on any

exchange;

(2) Seeks to increase the capacity of

any options exchange or the options

industry to disseminate quote or trade

data; or

(3) Seeks to introduce new equity

option products. For purposes of this

Section, listing an option that is listed

on another exchange or exchanges shall

Federal Register / Vol. 65, No. 187 / Tuesday, September 26, 2000 / Notices 57831

not constitute retaliation, harassment or

intimidation against such exchange or

exchanges.

V. Exceptions

Nothing in this Final Judgment shall

be construed to:

A. Enjoin or prohibit conduct

expressly permitted by statute, SEC rule,

SEC order, or exchange rule made

legally effective by formal filing with

the SEC and satisfaction of appropriate

SEC process, or authorized by SEC

personnel.

B. Enjoin or prohibit any defendant

from making unilateral business

decisions, reflecting independent

business judgment based upon factors

set forth in SEC approved rules,

regarding whether to list or delist an

option class, whether to introduce a

new option product, or whether to

increase or decrease capacity to list

option classes.

C. Address the legality of a merger, or

acquisition of another exchange, or a

legitimate joint venture between a

defendant exchange and a nondefendant.

D. Enjoin or prohibit conduct

protected by the doctrine established in

Eastern Railroad Presidents Conference

v. Noerr Motor Freight, Inc., 365 U.S.

127 (1961), and its progeny.

E. Enjoin or prohibit any exchange

member or market maker from

unilaterally setting the spreads,

quantities or prices at which such

member or market maker will trade any

option.

F. Enjoin or prohibit any exchange

member or market maker from

communicating to any person the

spreads, quantities or prices at which it

is willing to trade any option, for the

purpose of exploring the possibility of a

purchase or sale of such option, or to

negotiate for or agree to such purchase

or sale.

G. Enjoin or prohibit any defendant

from engaging in actions necessary to

surveillance and enforcement activities

undertaken pursuant to the Amended

and Restated Agreement, dated June 20,

1994, defining, governing, and

regulating the Intermarket Surveillance

Group and any amendment or successor

to the Intermarket Surveillance Group

agreement.

VI. Required Conduct

Each defendant is ordered to initiate

and maintain an antitrust compliance

program which shall include

designating, within sixty (60) days of

the entry of this Final Judgment, an

Antitrust Compliance Officer, who shall

be responsible for establishing and

maintaining an antitrust compliance

program designed to provide reasonable

assurance of compliance with this

consent judgment and with the federal

antitrust laws by the defendant in

connection with operating a venue for

options trading. The Antitrust

Compliance Officer shall also:

A. Distribute, within thirty (30) days

from the entry of this Final Judgment or

designation of the Antitrust Compliance

Officer, whichever is later, a copy of this

Final Judgment to: (i) all members of the

board of directors or governors of the

defendant; (ii) all officers of the

defendant; (iii) all employees of the

defendant whose duties or

responsibilities include selecting option

classes to be listed, developing new

options products, surveillance,

enforcement or ensuring compliance

with laws and regulations; and (iv) all

members of any committee of the

defendant whose duties or

responsibilities include selecting option

classes to be listed, developing new

options products or surveillance,

enforcement or ensuring compliance

with laws and regulations;

B. Distribute within thirty (30) days of

appointment or assignment a copy of

this Final Judgment to: (i) any person

who becomes a member of the board of

directors or governors of the defendant;

(ii) any person who becomes an officer

of the defendant; (iii) any person who

becomes an employee of the defendant

whose duties or responsibilities include

selecting option classes to be listed,

developing new options products,

surveillance, enforcement or ensuring

compliance with laws and regulations;

and (iv) any person who becomes a

member of any committee of the

defendant whose duties or

responsibilities include selecting option

classes to be listed, developing new

options products, or surveillance,

enforcement or ensuring compliance

with laws and regulations;

C. Brief annually those persons

designated in paragraphs A and B of this

subsection on the meaning and

requirements of the federal antitrust

laws in connection with operating a

venue for trading options and of this

Final Judgment and inform them that

the Antitrust Compliance Officer or a

designee of the Antitrust Compliance

Officer is available to confer with them

regarding compliance with such laws

and with this Final Judgment;

D. Obtain from each person

designated in paragraphs A and B of this

subsection an annual written

certification that he or she: (a) has read

and agrees to abide by the terms of this

Final Judgment; and (b) has been

advised and understands that

noncompliance with this Final

Judgment may result in his or her being

found in civil or criminal contempt of

court; and

E. Maintain a record of persons to

whom this Final Judgment has been

distributed and from whom the

certification required by paragraph D of

this Section has been obtained.

VII. Certifications

Within ninety (90) days after entry of

this Final Judgment, each defendant

shall certify to the Court and to the

Assistant Attorney General in charge of

the Antitrust Division that the

defendant: (a) has designated an

Antitrust Compliance Officer, specifying

his or her name, business address, and

telephone number; and (b) as

distributed this Final Judgment, briefed

the appropriate persons, and obtained

certifications, as required by Section VI.

VIII. Plaintiff’s Access

A. For the sole purpose of

determining or securing compliance

with this Final Judgment, or of

determining whether the Final

Judgment should be modified or

vacated, and subject to any legally

recognized privilege, from time to time

duly authorized representatives of the

Department of Justice shall, upon

written request of the Attorney General

or of the Assistant Attorney General in

charge of the Antitrust Division, and on

reasonable notice to any defendant at its

principal office, be permitted:

(1) Reasonable access during office

hours of such defendant to inspect and

copy all records and documents,

excluding individual customer records,

in the possession or under the control

of such defendant, which may have

counsel present, and which relate to any

matters contained in this Final

Judgment; and

(2) Subject to the reasonable

convenience of such defendant and

without restraint or interference form

the defendant, to interview officers,

employees, or agents of such defendant,

each of whom may have counsel

present, regarding any such matters.

B. Upon the written request of the

Attorney General or the Assistant

Attorney General in charge of the

Antitrust Division made to any

defendant, such defendant shall submit

such written reports, under oath if

requested, relating to any of the matters

contained in this Final Judgment as may

be requested.

C. Each defendant shall submit an

annual report, in a form acceptable to

the Antitrust Division, identifying:

(1) Each request made in accordance

with its rules to list an option and what

action, if any, was taken; and

57832 Federal Register / Vol. 65, No. 187 / Tuesday, September 26, 2000 / Notices

(2) Each allegation of harassment or

threats in possible violation of Section

IV.C about which it is aware and what

action the defendant took to investigate

the allegation.

D. Each defendant shall submit a

semi-annual report, in a form acceptable

to the Antitrust Division, setting out

each listing of a new option and each

delisting of an option that occurred

during that period.

E. Each defendant shall submit to the

Antitrust Division a copy of any filing

or submission to the SEC that relates to

compliance (including any request for

extension of time or for additional time

for compliance) with Section IV, above,

or Sections IV.B. (a), (b), (c), (h), or (j)

of the Order Instituting Public

Proceedings, Making Findings and

Imposing Remedial Sanctions against

defendants, Release No. 43268, issued

by the SEC on September 11, 2000.

F. No information or document

obtained by the means provided in

Section VIII shall be divulged by any

representative of the Department of

Justice to any person other than a duly

authorized representative of the

Executive Branch of the United States,

or the SEC, except in the course of legal

proceedings to which the United States

is a party, or for the purpose of securing

compliance with this Final Judgment, or

as otherwise required by law.

G. If at the time information or

documents are furnished by any

defendant to the United States, such

defendant represents and identifies in

writing the material in any such

information or documents to which a

claim of protection may be asserted

under Rule 26(c)(7) of the Federal Rules

of Civil Procedure, and such defendant

marks each pertinent page of such

material, ‘‘Subject to claim of protection

under Rule 36(c)(7) of the Federal Rules

of Civil Procedure,’’ then the United

States shall give such defendant ten (10)

calendar days notice prior to divulging

such material in any legal proceeding

(other than a grand jury proceeding).

H. Each defendant shall have the right

to claim protection from public

disclosure, under the Freedom of

Information Act, 5 U.S.C. 552, or any

other applicable law or regulation, for

any material submitted to the Antitrust

Division under this Final Judgment.

After appropriate consideration of such

claim of protection, the Antitrust

Division will either assert that the

material is protected from disclosure

under law or give such defendant ten

(10) calendar days notice of its intent to

disclose the material.

IX. Jurisdiction Retained

Jurisdiction is retained by this Court

to enable any of the parties to this Final

Judgment to apply to this Court at any

time for such further orders and

directions as may be necessary or

appropriate for the construction or

implementation of this final Judgment,

for the enforcement or modification of

any of its provisions, and for the

punishment of any violation hereof.

X. Expiration of Final Judgment

This Final Judgment shall expire ten

(10) years from the date of entry.

XI. Public Interest Determination

Entry of this Final Judgment is in the

public interest.

Dated: lll.

lllllllllllllllllllll

United States District Judge

Competitive Impact Statement

The United States, pursuant to

Section 2(b) of the Antitrust Procedures

and Penalties Act (‘‘APPA’’), 15 U.S.C.

16(b)–(h), files this Competitive Impact

Statement relating to the proposed Final

Judgment submitted for entry in this

civil antitrust proceeding.

I. Nature and Purpose of the Proceeding

On September 11, 2000, the United

States filed a civil antitrust Complaint

alleging that the defendants had

violated Section 1 of the Sherman Act,

15 U.S.C. 1. Defendants are option

exchanges that provide a forum on

which their members trade options. An

option is the right either to buy or to sell

a specified amount or value of a

particular underlying interest (equity

security, stock indices, government debt

securities or foreign currencies) at a

fixed exercise price by exercising the

option before its specified expiration

date. An equity option is one in which

the underlying interest is an equity

security. Since the early 1990s,

exchanges have been permitted to list

options or any equity security that

meets certain listing criteria. The

Complaint alleges that, beginning in the

early 1990’s, an agreement arose among

the defendants to limit competition

among themselves by not listing options

that were already listed on another

exchange.

On September 11, 2000, the United

States and the defendants filed a

Stipulation in which they consented to

the entry of a proposed Final Judgment

that requires defendants to eliminate the

anticompetitive conduct identified in

the Complaint. Specifically, the

proposed Final Judgment prevents the

defendants from allocating equity

options between or among exchanges or

from agreeing that an equity option will

be traded exclusively on any one

exchange. The proposed Final Judgment

also prohibits an exchange from

maintaining any rule, policy, practice,

or interpretation that directly prohibits,

or that has the purpose and an effect or

indirectly prohibiting, the multiple

listing of equity options. Further, the

Final Judgment enjoins defendants from

retaliating, harassing or intimidating

any exchange or member of an exchange

for listing an equity option or

introducing a new equity option

product.

The United States and the defendants

have agreed that the proposed Final

Judgment may be entered after

compliance with the APPA. Entry of the

Final Judgment would terminate the

action except that the Court would

retain jurisdiction to construe, modify,

or enforce its provisions and to punish

violations thereof.

Defendants have also reached an

agreement with the Securities and

Exchange Commission (‘‘SEC’’ or

‘‘Commission’’) to resolve issues raised

by that agency’s investigation of the

options industry. The SEC’s

investigation has been resolved through

the SEC’s issuance of an Order

Instituting Public Administration

Proceedings Pursuant to Section

19(h)(1) of the Securities Exchange Act

of 1934, Making Findings and Imposing

Remedial Sanctions against the

defendants (‘‘SEC Order’’). SEC Release

No. 43268, September 11, 2000. The

SEC Order was issued essentially

simultaneously with the filing of the

Department’s Complaint in this matter.

The Department and the Commission

cooperated in their investigations and

coordinated the settlements of them.

The SEC Order includes significant

provisions that require changes in the

ways exchanges interact and conduct

business, which will correct some of the

past practices of the exchanges that

facilitated the multi-listing agreement

and will ensure additional competition

in these markets going forward.

II. Description of the Events Giving Rise

to the Alleged Violation

A. Background on Options Trading

Each defendant is independent and

competes against the other defendants

in listing options. Defendants provide a

forum (commonly known as a ‘‘floor’’)

on which their members trade options.

Exchanges compete for orders by,

among other things, offering lower

transaction fees and higher quality

services, including quicker execution

and greater liquidity, than their

competitors. In addition, exchange

Federal Register / Vol. 65, No. 187 / Tuesday, September 26, 2000 / Notices 57833

1The exchanges were allowed to choose the order

in which their exclusives would become available

for multiple trading in the phase out period. The

exchanges uniformly chose to open their exclusives

to the possibility of multiple listing based on

trading value, with the most actively traded, and

therefore most vulnerable to multiple listing, made

available last, in late 1994.

members making a market in a

particular option compete with other

market makers, on that exchange and on

other exchanges on which the option is

listed, in the prices they offer to buy and

sell options.

An exchange’s quoted prices to buy

and sell a given option are the best

prices available from the multiple

market makers on a floor of the

exchange (referred to as a ‘‘crowd’’). An

exchange’s quoted price to buy an

option (its ‘‘bid’’) and price to sell (its

‘‘ask’’) are transmitted to the Options

Price Reporting Authority (‘‘OPRA’’),

which transmits the information,

combined with information from the

other options exchanges, to third parties

for processing and distribution. This

information is used by market makers in

setting prices and by the public in

making investment decisions. At any

given time, any exchange may have the

best bid or ask in a particular option.

One of the ways market makers seek

to profit from their market making

activities is from the difference between

their bid and ask, i.e., the difference

between their price to buy and sell the

same option, which is referred to as the

spread. A wider spread in an option

generally results in less favorable prices

to investors. Competition between

exchanges for the business of investors

has the effect of narrowing spreads.

Prior to January 20, 1990, SEC rules

prohibited, with few exceptions, equity

options from being traded on more than

one exchange. The SEC subsequently

rescinded these rules and adopted Rule

19c–5. This action was taken in part

based on the SEC belief that investors

would benefit from options being

multiply listed. From January 20, 1990,

going forward, the SEC contemplated

that each exchange would be permitted

to list any equity option as long as its

underlying security met specific criteria,

such as having a trading history and

sufficient activity, to make it eligible for

listing as an option.

Equity options were opened to

multiple listing over a period of time.

Exchanges were permitted to multiply

list ‘‘new’’ options, i.e., options whose

underlying security interest had not

previously been listed on any exchange,

without limitation. Approximately 700

options that had been allocated to

specific exchanges prior to January 20,

1990, were opened to multiple listing in

phases over a period from late 1992 to

late 1994. When the last phase ended in

late 1994, all equity options could be

listed and traded by any of the

defendants.

B. Illegal Agreement to Allocate Options

In the early 1990s defendants, and

others not named in this Complaint,

agreed to limit competition among

themselves by not listing options that

were already listed on another

exchange. The Department’s

investigation determined that from the

early 1990s until at least the summer of

1999 a significant number of the

industry’s most actively-traded options

were listed on a single exchange. During

this period, there was tremendous

growth in options trading which should

have made multiple listing more

attractive. Absent an agreement, it

would have sometimes been in the

economic self-interest of an exchange,

freely competing with other exchanges,

or in the interests of its members, to list

options traded on another exchange.

The Department’s investigation

uncovered significant evidence that the

exchanges reached an agreement that no

exchange would list an option already

listed elsewhere.

The Joint Exchange Options Plan

Following the adoption of Rule 19c–

5, the defendants adopted procedures

for listing new equity options. These

procedures were contained in the

‘‘Joint-Exchange Options Plan’’

(‘‘Options Plan’’). The Options Plan

required each exchange to pre-announce

its intention to list a new equity option

class, established a twenty-four hour

time frame for other exchanges to

announce their intention to list the same

option, and provided waiting periods

before any exchange could start trading.

The Options Plan also provided that if

an exchange was not the first exchange

to announce an intent to list or did not

submit a notice of intent to list within

the twenty-four hour period following

the initial notice (referred to as the

‘‘initial listing window’’ herein), it had

to wait until at least the eighth business

day after the date of the initial notice

before it could list and begin trading the

option.

The Options Plan was central to the

agreement among the exchanges.

Although the language of the Options

Plan provided that an exchange could

list and begin trading previously listed

options after waiting eight days,

defendants undertook to develop

additional procedures to govern the

multiple listing of equity options

already listed on an exchange.

Beginning in 1992, defendants engaged

in protracted discussions regarding the

development of such procedures.

By the end of 1994, when the last

most actively-traded options were about

to become available for multiple

listing,1 the proposed procedures for

listing existing options had become

complex and highly restrictive. The

exchanges could not agree on ground

rules for multiple listing and active

discussion of multiple listing ceased.

The interpretation of the Options Plan

adopted by the exchanges and the

absence of an agreed-upon procedure

meant that no exchange would engage

in multiple listing, other than listing

new options in the initial listing

window.

During the course of defendants’

discussions about the Options Plan, an

agreement between and among

defendants developed that each

defendant would refrain from listing

equity options classes that were already

listed on another exchange. Pursuant to

this agreement, each defendant

exchange would refrain from listing

equity option classes that were already

listed on another exchange. The

exchanges were able to preserve the

agreement by, among other things, the

actions set forth below.

Listing Committee Procedures

Beginning in the early 1990’s,

exchange employees uniformly avoided

considering option classes already

traded elsewhere for listing on their

exchange. The internal procedures for

assessing listing opportunities at the

several exchanges excluded

consideration of options already listed

on another exchange. In addition,

employees responsible for listing at each

of the exchanges did not consider listing

an option already listed on another

exchange. Rather, these employees

limited themselves to considering

options that (1) were becoming eligible

for listing or (2) for which they had

received notice that another exchange

was going to list and for which they had

a one-day opportunity to join in listing,

or challenge the listing of, under the

terms of the Options Plan.

In addition, exchange members who

wished to have their exchange begin to

list an option that was already traded

elsewhere had no formal means to bring

their requests to exchange listing

committees for consideration.

Nevertheless, on a few occasions,

market makers or broker/dealers sought

to induce an exchange to list an option

listed on another exchange. These

requests were always rejected.

57834 Federal Register / Vol. 65, No. 187 / Tuesday, September 26, 2000 / Notices

Corporate Mergers

A recurring threat to the agreement

was a situation in which a company

whose options were exclusively traded

on one exchange merged with a

company whose options were traded

exclusively on another. To deal with

such situations, the exchanges adhered

to a protocol for determining which

exchange would assume responsibility

for the options of the merged company.

Generally, the protocol provided that,

in stock transactions, when the

acquiring and acquired companies were

of different sizes, the exchange on

which options of the larger company

were listed would continue to trade the

option and the exchange on which the

options of the smaller company were

listed would not. As a result, in many

cases, an exchange would not trade

options on a merging company even

though it was in a good position to

compete for such trades. On occasion,

exchanges would utilize the Options

Clearing Corporation (‘‘OCC’’) to act as

an arbiter of which exchange would list

an option following a merger.

Coordination, Threats, Intimidation and

Harassment

Changes in market conditions

sometimes strained the agreement. As

option markets evolved, each

exchange’s incentives changed and, at

one time or another, one of the

exchanges considered taking action that

would threaten the agreement. In one

instance, an exchange considered

multiple listing in an effort to increase

the volume of options traded on its

floor. Other threats to the agreement,

during the course of the decade, were

posed by exchanges that considered

violating the merger protocol or

considered listing new option products

that might substitute for exclusives on

other exchanges.

In each instance identified during the

Department’s investigation, the

exchange about to take action that might

have contravened the agreement did not

do so. In many instances, there was

some form of communication between

the exchange about to take the step and

another exchange. Generally, employees

of one exchange would contact

employees of a second exchange and

ensure that the second exchange did not

encroach on listings allocated to the first

by the agreement.

Further, in other instances, one

exchange would pressure another, or the

market makers on that exchange, in

some way in order to stop a threat to the

agreement. Generally, the threats

involved the promise of retaliatory

listing of valuable exclusives or some

other form of economic harm to the

exchange or market maker. In sum,

threats, intimidation and harassment

helped preserve the agreement.

Use of OPRA To Preserve the Agreement

The defendant exchanges also relied

on their joint participation in OPRA to

reduce threats to the agreement. OPRA

is jointly controlled by the four

defendant exchanges. It contracts with

the Securities Industry Automation

Corporation to consolidate and transmit

information on quotes and transactions

from the exchanges to third parties, who

send it to investors, brokerage houses

and back to exchanges. In this process,

OPRA acts as the exchanges’ agent to

acquire the message capacity needed to

accept and forward the quote and

transaction information generated by the

exchanges. Decisions on the amount of

message capacity OPRA will acquire

and how it is allocated among

exchanges are reached jointly by the

defendant exchanges.

Historically, this structure gave

exchanges the ability to jointly control

the amount of message capacity

available to each exchange. Because of

the operation of OPRA, the exchanges

were collectively able to limit capacity,

which discouraged multiple listing.

Break Down of the Agreement

In November 1998, the Department

opened an investigation into allegations

of collusion among the four existing

options exchanges. The SEC also

opened an investigation of the options

markets. In the summer of 1999, all the

defendants began to list many options

that were already listed on another

exchange. The exchanges’ change in

behavior cannot be explained by

concurrent changes in the market or the

fundamentals of the underlying stocks.

Effects of the Agreement

The purpose and effect of the

agreement was to limit competition

among exchanges in the purchase and

sale of options. As a result of the

agreement, price competition among the

defendants and co-conspirators in the

purchase and sale of some options was

unreasonably restrained. In addition,

consumers were denied the benefits of

lower transaction fees and higher

quality executions, including quicker

executions and greater liquidity that

would have occurred had the exchanges

competed by multiply listing equity

options. In sum, investors who have

purchased or sold options that would

have been multiply listed were deprived

of the benefits of free and open

competition in the purchase and sale of

options.

III. Explanation of the Proposed Final

Judgment

Agreements

The proposed Final Judgment

(Section IV.A) ensures that defendants

do not enter into, continue or reinstate

agreements among themselves relating

to whether, or the circumstances under

which, options will be listed on a

particular exchange. To this end, it

enjoins each defendant from agreeing

with another exchange, directly or

indirectly, to trade an option class

exclusively on one exchange, to allocate

any option class between or among

exchanges or to require, prevent or limit

the listing or delisting of any option

class. This provision would also

preclude agreements like the protocol

governing corporate mergers and covers

agreements with all existing and future

exchanges.

Rules, Practices and Procedures

The proposed Final Judgment

(Section IV.B) also prohibits any

defendant from maintaining any rule,

policy, practice or interpretation that

directly prohibits or that has the

purpose and effect of indirectly

prohibiting it from listing an option

class because the option class is listed

on another exchange. This provision is

meant to preclude the development of

internal exchange procedures, like those

uncovered in the investigation, that

effectively prevented exchange

employees and members from having an

option already listed elsewhere be listed

on an exchange. Having such

procedures in place helped preserve the

agreement among the exchanges.

Threats, Harassment and Intimidation

The proposed Final Judgment

(Section IV.C) bars each of the

defendants from threatening to retaliate,

retaliating against, harassing or

intimidating any exchange or any

exchange member because it begins to

list or trade an option class. It also

forbids such conduct in response to an

exchange seeking to increase OPRA

capacity or an exchange or exchange

member seeking to introduce a new

options product. This provision will

ensure that the exchanges cannot use

such tactics in the future to discourage

competitive behavior or enforce

anticompetitive agreements.

Exceptions

The proposed Final Judgment

includes a section designed to ensure

that the Final Judgment is not construed

to prohibit certain conduct. Specifically,

Section V.A states that the proposed

Final Judgment shall not be construed to

Federal Register / Vol. 65, No. 187 / Tuesday, September 26, 2000 / Notices 57835

2The Intermarket Surveillance Group is an

exchange organization formed to detect illegal

activity occurring across the options exchanges.

prohibit conduct expressly permitted by

statute, SEC rule, SEC order, exchange

rule or authorized by SEC personnel.

Authorized by SEC personnel means, for

purposes of the decree, that the conduct

has been explicitly described to the SEC

in writing, and about which the SEC has

stated, in a writing signed by a person

at the Directory level or higher, that it

has no objection to such conduct or

otherwise approves it. Conduct is also

‘‘authorized by SEC personnnel’’ if it

has been expressly requested to be

undertaken in a writing signed by a

person at the Director level or higher.

Section V.B provides that the decree

does not prohibit any defendant from

making unilateral business decisions,

reflecting independent business

judgment based upon factors set forth in

SEC approved rules, regarding whether

to list or delist an option class, whether

to introduce a new option product, or

whether to increase or decrease capacity

to list option classes.

Nor does the proposed Final

Judgment (i) address the legality of a

merger, or acquisition of another

exchange, or a legitimate joint venture

between a defendant exchange and a

non-defendant (Section V.C); (ii) limit

defendants’ right to petition in

accordance with the doctrine

established in Eastern Railroad

Presidents Conference v. Noerr Motor

Freight, Inc., 365 U.S. 127 (1961), and

its progeny (Section V.D); or (iii)

prohibit an exchange member from

engaging in normal business activity

such as unilaterally setting the spreads,

quantities or prices at which such

member will trade any option or

communicating terms at which he or

she is willing to trade any option, for

the purpose of exploring the possibility

of a purchase or sale of such option

(Sections V.E and V.F). Finally, the

Final Judgment does not prohibit

defendant exchanges from undertaking

surveillance or taking action in

conjunction with the Intermarket

Surveillance Group (Section V.G).2

Additional Relief

The proposed Final Judgment would

further require each defendant to

establish and maintain an antitrust

compliance program (Section VI). Under

the compliance program, an Antitrust

Compliance Officer, to be appointed by

each defendant, is required to distribute

copies of the Final Judgment to certain

personnel, including members of a

defendant’s board of directors or

governors, all officers and all employees

and members whose responsibilities

include selecting option classes to be

listed, developing new options products

or surveillance, enforcement or ensuring

compliance with laws and regulations.

The Antitrust Compliance Officer must

also brief defendant’s personnel on the

meaning and requirements of the federal

antitrust laws and the meaning of the

Final Judgment, as well as obtain their

certification that they have read and

agree to abide by the Final Judgment

and understand the penalties for noncompliance.

The Final Judgment further provides

that the United States may obtain

information from defendants concerning

possible violations of the Final

Judgment (Section VIII.A and B). Each

Antitrust Compliance Officer is required

to submit an annual report that details

each request made to list an option and

what action was taken in response to the

request, and to provide information on

each allegation of harassment in

possible violation of Section IV.C and

what efforts were undertaken to

investigate it (Section VIII.C).

Defendants are required to report semiannually on each option that has been

listed or delisted (Section VIII.D).

In order to facilitate monitoring of

regulatory filings that may affect the

Final Judgment, the Final Judgment

provides that each defendant must

submit to the Department copies of any

filing or submission to the SEC that

relates to compliance with Section IV of

the decree, or Sections IV.B. (a), (b), (c),

(h) or (j) of the SEC Order (Section

VIII.E). The obligation extends to any

request, formal or informal, to the SEC,

including any request for extension of

time or additional time for compliance.

This will allow the Department to

consult with the SEC on proposed

changes to provisions of the SEC Order

that are important to promoting

competition.

SEC Action

The Department determined that,

because of the important role played by

the SEC in regulating this industry,

various corrective actions needed to

prevent the recurrence of the agreement

alleged in the Compliant and to promote

competition could best be addressed by

the SEC. Some activities or changes in

activities that were needed required

new rules or rule modifications that

would need to be filed with and

reviewed by the SEC. The Department,

therefore, has worked with the SEC to

see that needed corrective actions were

included in the SEC Order.

For example, the Options Plan needed

to be modified to make it less useful as

a way to signal the intent of an exchange

to multi-list or to allow one exchange to

delay another from listing a particular

option. The best way to address this

problem was to require defendants to

propose revisions to the Options Plan

that will eliminate the opportunity to

engage in anticompetitive conduct and

for the SEC to conduct a rulemaking

proceeding to revise the Options Plan.

Consequently, in Section IV.B.(a) of the

SEC Order, the defendants have

committed to submit rules eliminating

anticompetitive provisions of the

Options Plan no later than 90 days after

entry of the SEC Order.

Similarly, the absence of procedures

for exchange members to get prompt

consideration of multiple listing

proposals is best addressed by requiring

defendants to formulate procedural

rules that would provide for the

submissions and processing of such

requests. Therefore, in Section IV.B.(b)

of the SEC Order, defendants have

committed to submit rules establishing

such procedures no later than 120 days

after entry of the SEC Order. The rules

to be submitted will require each

exchange to specify the criteria it will

use to consider such requests and to

respond to such requests in writing

within a specified time frame.

As noted above, OPRA, as

traditionally managed, has served to

create a shared industry capacity for the

dissemination of quote and trade data in

the options markets. This approach has

led to a situation where the exchange

participants in OPRA have managed

data transmission capacity growth and

allocation as a joint endeavor. Thus,

each competitor has had knowledge of

every other competitor’s capacity plans

and needs and, by acting jointly, the

exchanges can thwart competitors’ plans

by failing to provide needed capacity.

The Department believes that the

option industry must be required to

move away from the shared capacity

paradigm in order for competition to

significantly increase. To that end,

defendant exchanges have agreed to

move to a system in which each

exchange can acquire and manage its

own data transmission capacity

independently. Significant changes in

the rules under which OPRA operates

are necessary in order to achieve this

result. Specifically, defendants have

agreed, as a part of the SEC Order, to

modify the structure and operation of

OPRA to (i) establish a system for

procuring and allocating data

transmission capacity that eliminates

joint action by the participants in OPRA

in determining the amount of total

capacity procured and the allocation

thereof, and provides that each

participant in OPRA will independently

57836 Federal Register / Vol. 65, No. 187 / Tuesday, September 26, 2000 / Notices

3 119 Cong. Rec. 24598 (1973). See United States

v. Gillette Co., 406 F. Supp. 713, 715 (D. Mass.

1975). A ‘‘public interest’’ deterination can be made

properly on the basis of the Competitive Impact

Statement and Response to Comments filed

pursuant to the APPA. Although the APPA

authorizes the use of additional procedures, 15

U.S.C. 16(f), those procedures are discretionary. A

court need not invoke any of them unless it believes

that the comments have raised significant issues

determine the amount of capacity it will

obtain; (ii) establish a system for

gathering and disseminating business

information from and to participants of

OPRA such that all non-public

information specific to a participant in

OPRA shall remain segregated and

confidential from other participants;

and (iii) set forth a statement of OPRA’s

functions and objectives and provide for

rules and procedures that limit any joint

action by the participants in OPRA to

circumstances in which such joint

action is necessary in order to fulfill the

stated functions and objectives. SEC

Order Section IV.B.(c). Defendants have

committed to submit rules establishing

such procedures no later than seven

months after entry of the SEC Order.

The defendants have also agreed, as

part of the SEC order to increase

transparency on the activities on their

trading floors. Specifically, Section

IV.B.(j) of the SEC order requires that

any practice or procedure, not currently

authorized by rule, by which any market

makers trading any particular option

class determine by agreement the

spreads or option prices at which any

particular option class, or the allocation

of orders in an option class, be filed for

approval within six months of the date

of the SEC order. The defendants have

committed to stop any such practice or

procedure that is not submitted to and

ultimately approved by the

Commission. This obligation will ensure

that market maker practices concerning

spreads, option prices and order

allocations are permitted by the SEC

and are publicly known. This will

promote competition between market

makers to the benefit of investors.

Other provisions of the SEC Order

will also promote competition. In this

regard, the SEC Order provides for

significant increases in expenditures for

surveillance activities by the

defendants, particularly with respect to

options order handling rules governing

best execution, limit order display,

priority rules, trade reporting and firm

quotes. It also requires exchanges to

report trades within 90 seconds and to

enhance incentives to quote

competitively, particularly in the

context of automatic execution systems.

Taken together, these actions constitute

a major restructuring of the options

industry and a dramatic move toward

increasing competition in it.

IV. Remedies Available to Private

Litigants

Section 4 of the Clayton Act, 15

U.S.C. 15, provides that any person who

has been injured as a result of conduct

prohibited by the antitrust laws may

bring suit in federal court to recover

three times the damages suffered, as

well as costs and reasonable attorneys’

fees. Entry of the proposed Final

Judgment will neither impair nor assist

the bringing of such actions. Under the

provisions of Section 5(a) of the Clayton

Act, 15 U.S.C. 16(a), the Final Judgment

has no prima facie effect in any

subsequent lawsuits that may be

brought against the defendants.

V. Procedures Available for

Modification of the Proposed Final

Judgment

The United States and defendants

have stipulated that the proposed Final

Judgment may be entered by the Court

after compliance with the provisions of

the APPA, provided that the United

States has not withdrawn its consent.

The APPA conditions entry upon the

Court’s determination that the proposed

Final Judgment is in the public interest.

The Department believes that entry of

this Final Judgment is in the public

interest.

The APPA provides a period of at

least sixty days preceding the effective

date of the proposed Final Judgment

within which any person may submit to

the United States written comments

regarding the proposed Final Judgment.

Any person who wishes to comment

should do so within sixty days of

publication of this Competitive Impact

Statement in the Federal Register. The

United States will evaluate and respond

to the comments. All comments will be

given due consideration by the

Department of Justice, which remains

free to withdraw its contents to the

Final Judgment at any time prior to

entry. The comments and the responses

of the United States will be filed with

the Court and published in the Federal

Register. Written comments should be

submitted to: Nancy M. Goodman,

Chief, Computers and Finance Section,

Antitrust Division, U.S. Department of

Justice, 600 E Street, NW., Suite 9500,

Washington, DC 20530.

The proposed Final Judgment

provides that the Court retains

jurisdiction over this action, and the

parties may apply to the Court for any

order necessary or appropriate for the

modification, interpretation, or

enforcement of the Final Judgment. The

proposed Final Judgment would expire

ten (10) years from the date of its entry.

VI. Alternatives to the Proposed Final

Judgment

As an alternative to the proposed

Final Judgment, the Department

considered litigation on the merits. The

Department rejected that alternative for

two reasons. First, a trial would involve

substantial cost both to the United

States and to the defendants, and is not

warranted since the proposed Final

Judgment provides all the relief the

Government would likely obtain

following a successful trial. Second, the

Department is satisfied that the various

compliance procedures to which

defendants have agreed will ensure that

the anticompetitive practices alleged in

the Complaint are unlikely to recur and,

if they do recur, will be punishable by

civil or criminal contempt, as

appropriate.

VII. Standard of Review Under the

APPA for the Proposed Final Judgment

The APPA requires that proposed

final judgments in antitrust cases

brought by the United States be subject

to a sixty-day comment period, after

which the Court shall determine

whether entry of the proposed final

judgment ‘‘is in the public interest.’’ In

making that determination

the court may consider:

(1) the competitive impact of such

judgment, including termination of alleged

violations, provisions for enforcement and

modification, duration or relief sought,

anticipated effects of alternative remedies

actually considered, and any other

considerations bearing upon the adequacy of

such judgment;

(2) the impact of entry of such judgment

upon the public generally and individuals

alleging specific injury from the violations

set forth in the complaint including

consideration of the public benefit, if any, to

be derived from a determination of the issues

at trial.

15 U.S.C. 16(e) (emphasis added). As

the Court of Appeals for the District of

Columbia Circuit held, the APPA

permits a court to consider, among other

things, the relationship between the

remedy secured and the specific

allegations set forth in the government’s

complaint, whether the decree is

sufficiently clear whether enforcement

mechanisms are sufficient, and whether

the decree may positively harm third

parties. United States v. Microsoft, 56

F.3d 1448, 1458–62 (D.C. Cir. 1995).

In conducting this inquiry, ‘‘the Court

is nowhere compelled to go to trial or

to engage in extended proceedings

which might have the effect of vitiating

the benefits of prompt and less costly

settlement through the consent decree

process.’’ 3 Rather,

Federal Register / Vol. 65, No. 187 / Tuesday, September 26, 2000 / Notices 57837

and that further proceedings would aid the court in

resolving those issues. See H.R. 93–1463, 93rd

Cong. 2d Sess. 8–9, reprinted in (1974) U.S. Code

Cong. & Ad. News 6535, 6538.

4United States v. Bechtel, 648 F.2d at 666

(citations omitted) (emphasis added); see United

States v. BNS, Inc., 858 F.2d at 463; United States

v. National Broadcasting Co., 449 F. Supp. 1127,

1143 (C.D. Cal. 1978); United States v. Gillette Co.,

406 F. Supp. at 716. See also United States v.

American Cyanamid Co., 719 F.2d 558, 565 (2d Cir.

1983).

1The findings herein are made pursuant to the

respondents’ Offers of Settlement and are not

binding on any other person or entity in this or any

other proceeding. Moreover, the findings made

herein do not affect any respondent’s rights in any

respect as to parties other than the Commission.

[a]bsent a showing of corrupt failure of the

government to discharge its duty, the Court,

in making its public interest finding, should

* * * carefully consider the explanations of

the government in the competitive impact

statement and its responses to comments in

order to determine whether those

explanations are reasonable under the

circumstances.

United States v. Mid-America

Dairymen, Inc., 1977–1 Trade Cas.

¶ 61,508, at 71,980 (W.D. Mo. 1977).

Accordingly, with respect to the

adequacy of the relief secured by the

decree, a court may not ‘‘engage in an

unrestricted evaluation of what relief

would best serve the public.’’ United

States v. BNS, Inc., 858 F.2d 456, 462

(9th Cir. 1988) quoting United States v.

Bechtel Corp., 648 F.2d 660, 666 (9th

Cir.), cert. denied, 454 U.S. 1083 (1981).

See also United States v. Microsoft, 56

F.3d 1448 (D.C. Cir. 1995). Precedent

requires that:

the balancing of competing social and

political interests affected by a proposed

antitrust consent decree must be left, in the

first instance, to the discretion of the

Attorney General. The court’s role in

protecting the public interest is one of

insuring that the government has not

breached its duty to the public in consenting

to the decree. The court is required to

determine not whether a particular decree is

the one that will best serve society, but

whether the settlement is ‘‘within the reaches

of the public interest.’’ More elaborate

requirements might undermine the

effectiveness of antitrust enforcement by

consent decree.4

The proposed Final Judgment,

therefore, should not be reviewed under

a standard of whether it is certain to

eliminate every anticompetitive effect of

a particular practice or whether it

mandates certainty of free competition

in the future. Court approval of a final

judgment requires a standard more

flexible and less strict than the standard

required for a finding of liability. ‘‘[A]

proposed decree must be approved even

if it falls short of the remedy the court

would impose on its own, as long as it

falls within the range of acceptability or

is ‘within the reaches of public interest.’

(citations omitted).’’ United States v.

American Tel. and Tel. Co., 552 F.

Supp. 131, 150 (D.D.C. 1982), aff’d sub

nom. Maryland v. United States, 460

U.S. 1001 (1983) quoting United States

v. Gillette Co., supra, 406 F. Supp. at

716; United States v. Alcan Aluminum,

Ltd., 605 F.Supp. 619, 622 (W.D. Ky.

1985).

Moreover, the court’s role under the

APPA is limited to reviewing the

remedy in relationship to the violations

that the United States has alleged in the

complaint, and does not authorize the

court to ‘‘construct [its] own

hypothetical case and then evaluate the

decree against that case.’’ Microsoft, 56

F.3d at 1459. Since ‘‘[t]he court’s

authority to review the decree depends

entirely on the government’s exercising

its prosecutorial discretion by bringing

the case in the first place,’’ it follows

that the court ‘‘is only authorized to

review the decree itself,’’ and not to

‘‘effectively redraft the complaint’’ to

inquire into other matters that the

United States might have but did not

pursue. Id.

VIII. Determinative Materials/

Documents

The Department considers the SEC

Order to be a determinative document

within the meaning of Section (b) of the

APPA, 15 U.S.C. § 16(b). As noted

above, the Department determined that

various corrective actions needed to

prevent the recurrence of the agreement

alleged in the Complaint and to promote

competition could best be addressed by

the SEC. Absent the SEC Order, the

Department would have included

additional corrective actions in this

settlement. Accordingly, the SEC Order

will be filed with this Final Judgment.

Dated: September 11, 2000.

Respectfully submitted,

George S. Baranko,

D.C. Bar No. 288407.

John D. Worland, Jr.,

D.C. Bar No. 427797.

John H. Chung, Molly L. Debusschere,

Catherine E. Fazio, Richard L. Irvine, Joshua

Soven,

Attorneys, U.S. Department of Justice,

Antitrust Division, 600 E Street, N.W., Suite

9500, Washington, D.C. 20530, Tel: 202/

307–6200, Fax: 202/616–8544.

In the Matter of Certain Activities of Options

Exchanges; Order Instituting Public

Administrative Proceedings Pursuant to

Section 19(h)(1) of the Securities Exchange

Act of 1934, Making Findings and Imposing

Remedial Sanctions

[Securities Exchange Act of 1934; Release No.

43268/September 11, 2000 and

Administrative Proceeding File No. 3–10282]

I

The Securities and Exchange

Commission (‘‘Commission’’) deems it

appropriate, in the public interest, and

for the protection of investors that

public administrative proceedings be

instituted pursuant to Section 19(h)(1)

of the Securities Exchange Act of 1934

(‘‘Exchange Act’’) against respondents

American Stock Exchange LLC, Chicago

Board Options Exchange, Inc., Pacific

Exchange, Inc. and Philadelphia Stock

Exchange, Inc. In anticipation of this

proceeding, the respondents have

submitted Offers of Settlement which

the Commission has determined to

accept. Solely for the purposes of this

proceeding and any other proceeding

brought by or on behalf of the

Commission or to which the

Commission is a party, and prior to a

hearing pursuant to the Commission’s

Rules of Practice, 17 CFR § 201.100 et

seq., the respondents, by their Offers of

Settlement, without admitting or

denying the Commission’s findings

except those contained in Section III.A.

below, which are admitted, consent to

the entry of this Order Instituting Public

Administrative Proceedings, Making

Findings and Imposing Remedial

Sanctions.

II

Accordingly, it is hereby ordered that

proceedings pursuant to Section

19(h)(1) of the Exchange Act be, and

they hereby are, instituted.

III

On the basis of this Order and the

Offers of Settlement submitted by the

respondents, the Commission finds 1

that:

A. Respondents

1. The American Stock Exchange LLC

The American Stock Exchange LLC

(‘‘AMEX’’) is located in New York, New

York. The AMEX is registered with the

Commission as an exchange pursuant to

Section 6 of the Exchange Act.

2. The Chicago Board Options

Exchange, Inc.

The Chicago Board Options Exchange,

Inc. (‘‘CBOE’’) is located in Chicago,

Illinois. The CBOE is registered with the

Commission as an exchange pursuant to

Section 6 of the Exchange Act.

3. The Pacific Exchange, Inc.

The Pacific Exchange, Inc. (‘‘PCX’’) is

located in San Francisco, California and

Los Angeles, California. Options trading

on the PCX is conducted in its San

Francisco facilities. The PCX is

registered with the Commission as an

57838 Federal Register / Vol. 65, No. 187 / Tuesday, September 26, 2000 / Notices

2 17 CFR 240.19c–5.

3For purposes of determining whether the

exchanges violated Section 19(g) of the Exchange

Act and Rule 19c–5 as incorporated into their rules,

the Commission need not determine, and does not

in this Order decide, whether or not this course of

conduct was pursuant to an agreement among them.

The conduct was inconsistent with Rule 19c–5 as

incorporated into their rules either way. However,

nothing stated herein would be inconsistent with a

finding that the exchanges have engaged in

collective conduct.

exchange pursuant to Section 6 of the

Exchange Act.

4. The Philadelphia Stock Exchange,

Inc.

The Philadelphia Stock Exchange,

Inc. (‘‘PHLX’’) is located in

Philadelphia, Pennsylvania. The PHLX

is registered with the Commission as an

exchange pursuant to Section 6 of the

Exchange Act.

B. Overview

The Commission, in its oversight of

the options exchanges, has investigated

significant issues relating to the

competitiveness of the options market

and the fulfillment by the options

exchanges of their obligations as selfregulatory organizations. Section 19(g)

of the Exchange Act obligates registered

exchanges to comply with their own

rules and to enforce compliance with

their own rules by their members and

persons associated with their members.

The options exchanges have

significantly impaired the operations of

the options market by (a) following a

course of conduct under which they

refrained from multiply listing a large

number of options; and (b) inadequately

discharging their obligations as selfregulatory organizations by failing

adequately to enforce compliance with

(i) certain of their rules, including order

handling rules, that promote

competition as well as investor

protection, and (ii) certain of their rules

prohibiting anticompetitive conduct,

such as harassment, intimidation,

refusals to deal and retaliation directed

at market participants who sought to act

competitively. In addition, the options

exchanges each have inadequately

discharged their obligations as selfregulatory organizations by failing to

enforce compliance with their trade

reporting rules, which promote

transparency of the market and facilitate

surveillance and enforcement of other

exchange rules and the federal securities

laws. These matters are discussed

below.

C. The Respondent Exchanges’

Impediments to Multiple Listing of

Options

1. Respondents Followed a Course of

Conduct that Limited Multiple Listing

Rule 19c–5 under the Exchange Act 2

incorporates into the rules of all

exchanges a prohibition against any

‘‘rule, stated policy, practice or

interpretation’’ that prohibits or

conditions the listing of any stock

option class listed on another exchange.

The respondent options exchanges

failed to comply with Rule 19c–5 as

incorporated into their rules, by

following a course of conduct under

which they refrained from multiply

listing certain options listed on a single

exchange that were available for

multiple listing.3 In this connection, the

respondents engaged in certain courses

of conduct that hindered, discouraged

or prevented the multiple listing of

these exclusively listed options,

including, among other things, the

following:

a. The respondents maintained (i) an

improper interpretation of procedures

for the listing of options that impeded

the multiple listing of options, and (ii)

improper limitations on the listing of

options that hindered the multiple

listing of options of merged entities;

b. Certain respondents improperly

deterred efforts by their members to

have the respondents multiply list

options; and

c. Certain respondents utilized their

voting power in the Options Price

Reporting Authority (‘‘OPRA’’), which

provides for the transmission of

quotations and trade reports from the

options market to vendors for

dissemination to the public, in an

improper effort to limit transmission

capacity in order to hinder and

discourage multiple listing of an option.

These activities are discussed below.

2. Respondents Impeded Competition in

Multiple Listing

a. Respondents’ Interpretation of the

Joint-Exchange Options Plan Inhibited

the Multiple Listing of Options

On September 17, 1991, the

Commission approved the JointExchange Options Plan (the ‘‘Joint

Plan’’), which set forth procedures

governing the listing of new options.

The Joint Plan did not restrict the

multiple listing of options that were

already exclusively listed at the time of

the plan’s adoption. The respondent

exchanges participated in

communications with each other about

the meaning of the Joint Plan after it was

authorized by the Commission, which

led to their interpretation that the

absence of procedures regarding the

exclusively listed options prevented

them from multiply listing any of the

exclusively listed options. This

interpretation of the Joint Plan

improperly created a barrier to the

multiple listing of options.

b. Respondents’ Course of Conduct

Impaired the Multiple Listing of

Options for Merged Entities

The respondent exchanges followed a

course of conduct that impaired the

multiple listing of options of merged

entities. In general, when a pubic

company acquired another public

company, both of which had options for

their securities exclusively listed on

different exchanges, the respondent

exchange on which options for the

acquiring company were listed would

thereafter list the options for the merged

entity. The respondent exchange on

which the options for the acquired

company had been listed would refrain

from listing the options of the merged

entity.

When the respondent exchanges

listing the options for the acquiring and

acquired companies disagreed about

which of them should list the options

for the merged entity, the exchanges

followed a procedure for resolving the

disagreement that resulted in only one

of the two exchanges listing the option

for the merged entity, thereby

improperly limiting competition in

listings.

c. Respondents Discouraged

Competitive Action by Their Members

Member firms of certain of the

respondent exchanges made proposals

to multiply list options. In order to

avoid or defer multiple listing, the

respondent exchanges rebuffed or

denied these proposals without an

adequate basis in their rules and, in

some instances, threatened or harassed

member firms who made the proposals.

d. Certain Respondents Acted Through

OPRA To Limit Transmission Capacity

OPRA provides for the transmission

of quotation and trade data from the

options exchanges to vendors that

disseminate such data to public

subscribers. OPRA historically has

contracted with a third party for

transmission capacity. The transmission

capacity is quantitatively limited at any

given point in time. In June 1998, the

options exchanges met at OPRA to

discuss the possibility of accelerating

the expansion of their transmission

capacity. Certain of the respondents

voted against the acceleration in order

to prevent the multiple listing of an

option. This resulted in a tie vote and

the planned capacity expansion was not

accelerated. The results of the vote in

Federal Register / Vol. 65, No. 187 / Tuesday, September 26, 2000 / Notices 57839

4Sections 19(g) and 19(h) of the Exchange Act, 15

U.S.C. §§ 78s(g) and 78s(h).

5With certain exceptions, priority rules generally

require that a customer limit order be executed

before any other orders if it has the best price (i.e.,

highest bid or lowest offer). If there is more than

one order at the best price, the customer order that

arrived at the trading post first has priority.

6Firm quote rules require specialists or market

makers to trade specified minimum numbers of

options at the prices they quote.

7The exchanges’ limit order display rules,

policies or procedures generally require that

customer limit orders that are priced better than the

highest bid or lowest ask price otherwise quoted on

the exchange be displayed in the quotations.

8The ‘‘bid-ask’’ spread is the difference between

the highest quoted bid price and the lowest quoted

ask price. The respondent exchanges have rules

prescribing maximum spreads that can be quoted

for options.

this instance allowed the facilities of

OPRA to be used improperly to

discourage multiple listing of an option.

e. In August 1999, the Respondent

Exchanges Began To Multiple List

Options

In August 1999, and soon thereafter,

the respondent exchanges initiated

multiple listing of a number of formerly

exclusively listed options.

D. The Respondent Exchanges’

Performance as Self-Regulatory

Organizations

The Exchange Act requires the

respondents, as registered exchanges, to

conduct oversight of their members and

their markets.4 In conducting such

oversight, the respondents must comply

with, and vigorously enforce, in an

evenhanded and impartial manner, the

provisions of the Exchange Act, the

rules and regulations thereunder and

their own rules. The respondents have

the affirmative obligation to be vigilant

in surveilling for and taking effective

enforcement action to address violations

of such provisions.

The respondents have not satisfied

their obligations under the Exchange

Act to enforce their rules and the federal

securities laws, in that they have

inadequately surveilled their markets

for potential violations, failed to

conduct thorough investigations when

needed, and failed adequately to enforce

rules applicable to members on their

floors. As a result of these regulatory

deficiencies, the respondents have

violated the Exchange Act. In addition,

the respondents have not adequately

addressed issues of competition that

have arisen in their markets. The

respondents’ regulatory deficiencies are

discussed at greater length below.

1. Respondents Have Engaged in

Inadequate Enforcement of Order

Handling Rules, Policies or Procedures

The respondents failed effectively to

enforce compliance by their members

with exchange rules, policies or

procedures relating to order handling.

More specifically, the respondents have

failed effectively to surveil for, or take

appropriate action with respect to

evidence of, violations of priority rules,5

firm quote rules,6 and limit order

display rules, policies or procedures.7

Respondents generally lack automated

surveillance systems, and rely too

heavily on complaints to detect

potential violations. In addition, when

violations were uncovered, respondents,

in many instances, did not take

appropriate enforcement action. In

many other instances, if enforcement

action was taken, respondents did not

impose sanctions adequate to provide

reasonable deterrence against future

violations. As a result of these

deficiencies in surveillance and

enforcement, the respondents did not

adequately enforce their order handling

rules.

2. Respondents Have Permitted

Deficiencies in Trade Reporting

The respondents failed effectively to

enforce compliance by their members

with exchange trade reporting rules. The

respondents have conducted either no

automated surveillance, or inadequate

automated surveillance, of trade

reporting. Their existing surveillance

processes have been inadequate to

ensure compliance with their trade

reporting rules. As a consequence, the

respondents failed adequately to detect

noncompliance by their members.

The respondents applied their trade

reporting requirements in a manner that

often allowed trades not to be reported

in a sufficiently prompt manner or they

utilized surveillance parameters that

were not sufficiently comprehensive to

adequately detect noncompliance with

the rules. The inadequacies of the

respondents’ application of their trade

reporting rules and surveillance for rule

violations have undermined effective

enforcement of those rules. Ensuring

reliable trade reporting enhances the

transparency of the markets and

effective surveillance and enforcement

with respect to order handling and other

rules.

3. Respondents Have Failed

Appropriately to Enforce Rules Relating

to Harassment and Intimidation of

Members

The respondents have failed

adequately to surveil for, or take

appropriate action with respect to

evidence of, harassment and

intimidation of members who acted

competitively or sought to act

competitively. Certain members on the

floors of the respondent exchanges who

competed or sought to compete on

certain occasions have indicated that

they have been subjected to harassment,

intimidation, refusals to deal and

retaliation by other participants on the

floors of the respondent exchanges. The

indicated harassment, intimidation,

refusals to deal and retaliation were, in

various instances, verbal, economic or

physical conduct, and could violate

exchange rules.

The respondents’ surveillance for

such improper conduct was deficient, in

that it relied on complaints and the

observations of limited numbers of floor

officials. The respondents did not have

effective means of surveillance for

refusals to deal or economic retaliation.

The respondents also responded

inadequately to indications of rule

violations that were brought to their

attention. In some instances, floor

officials overlooked indications of rule

violations by, or addressed them

selectively against, some members, but

not others. In a number of instances, the

respondent exchanges did not

investigate or failed adequately

investigate allegations of harassment,

intimidation, refusals to deal and

retaliation.

In addition, the respondents have not

taken appropriate steps to inquire into

quoting activities on their markets. Bidask quotations made on respondents’

markets have frequently been at the

maximum allowable bid-ask spreads.8

The frequency of maximum spreads

may indicate anticompetitive conduct.

The respondents have not adequately

surveilled or investigated for

anticompetitive conduct that may be

indicated by the high frequency of

maximum spreads.

E. Conclusion

Based upon the foregoing, the

Commission finds that during the

relevant period the AMEX, CBOE, PCX

and PHLX failed to comply with certain

of their rules, including, among others,

Rule 19c–5 promulgated under the

Exchange Act, and, without reasonable

justification or excuse, failed to enforce

compliance with certain of their own

rules, in violation of Section 19(g) of the

Exchange Act.

IV

In view of the foregoing, it is

appropriate, in the public interest, and

for the protection of investors to impose

the sanctions specified in the

Respondents’ Offers of Settlement.

Accordingly, it is hereby ordered that:

57840 Federal Register / Vol. 65, No. 187 / Tuesday, September 26, 2000 / Notices

9The AMEX and the CBOE have adopted new, or

amended existing, rules required by this

undertaking IV.B.b.(iv).

A. The AMEX, CBOE, PCX and PHLX

be, and hereby are, censured.

B. The AMEX, CBOE, PCX and PHLX

comply with the following undertakings

within the time frames specified below,

or such longer times as are (a) provided

by further order of the Commission or

(b) approved in writing by the Directors

of the Commission’s Division of

Enforcement, Division of Market

Regulation and Office of Compliance

Inspections and Examinations:

a. No later than four months after the

date of this Order, each respondent

exchange shall, acting jointly with all

other options exchanges, amend the

joint-Exchange Options Plan (the ‘‘Joint

Plan’’), so as to: (i) eliminate advance

notice to any other exchange, alternative

trading system, or other trading venue

that lists options issued by the Options

Clearing Corporation (collectively

referred to herein as ‘‘markets’’) of the

intention to list a new option; (ii)

eliminate advance notice to any other

market of the intention to list an

existing option, except for not more

than one business day’s notice to any

other market that already lists or has

applied to list the option in question;

(iii) eliminate any provisions of the Joint

Plan (other than any advance notice

provision permissible under (ii) of this

subsection) that prevent a market from

commencing to list or trade any option

listed on another market or an option

that another market has expressed an

intent to list; (iv) eliminate any

provisions of the Joint Plan allowing

one market to prevent or delay another

market from listing an option; and (v)

eliminate any provisions of the Joint

Plan that allow one market to delay the

commencement of trading of an option

by another market. Nothing in this

subsection shall prohibit any exchange

from providing (a) not more than one

business day’s notice to the Options

Clearing Corporation of the exchange’s

intention to list an existing option, or (b)

reasonable advance notice to the

Options Clearing Corporation of the

exchange’s intention to list a new

option. As part of its compliance with

this undertaking, each respondent

exchange shall, acting jointly with all

other options exchanges, discuss,

develop, and provide to the Commission

staff, no later than 60 days after the date

of the Order, draft proposed

amendments to the Joint Plan that

comply with Section 19 of the Exchange

Act and Rule 19b–4 thereunder and

which would be, if approved by the

Commission, sufficient to effect the

changes required by this undertaking;

provided, however, that in the absence

of joint agreement after a good faith

effort to reach joint agreement, each

respondent exchange shall individually

provide to the Commission staff, no

later than 90 days after the date of the

Order, draft proposed amendments

reasonably designed to effect the

changes required by this undertaking.

b. No later than six months after the

date of this Order, each respondent

exchange shall adopt new, or amend

existing, rules that establish formal

procedures for exchange members

(whether specialists, Designated

Primary Market Makers, Lead Market

Makers, or others) to submit proposals

for such respondent exchange to list

particular options classes (whether or

not such options are already traded on

any other exchange), which shall (i)

specify the criteria to be considered by

such respondent exchange in deciding

whether or not to approve such

proposals, or in placing conditions or

limitations, if any, on the approval of

such proposals; (ii) provide for a

reasonable time frame in which such

proposals will be reviewed and

decisions thereon made; (iii) require

such respondent exchange to respond in

writing to any proposal that is denied or

which is subject to conditions or

limitations, and specify in such written

response the bases for the denial or the

conditions or limitations; and (iv) in

such new or amended rules, or in code

of conduct provisions approved by the

Commission, prohibit any member,

officer, director, governor, employee,

committee member or agent of such

respondent exchange, or any other

person or entity subject to its

jurisdiction, from threatening, harassing

or retaliating against any person or

entity in any way because (aa) of a

listing proposal made by such person or

entity to any exchange or other market;

(bb) of such person’s or entity’s

advocacy or proposals concerning

listing or trading on any exchange or

other market; or (cc) such person or

entity commences to make markets in or

trade any option on any exchange or

other market.9 Actions taken by the

respondent exchanges in accordance

with rules filed with and approved by

the Commission pursuant to Section 19

of the Exchange Act shall not be deemed

to be threats, harassment or retaliation

for the purposes of this undertaking. As

part of its compliance with this

undertaking, each respondent exchange

shall provide to the Commission staff,

no later than 120 days after the date of

the Order, draft proposed rules, rule

amendments, and/or code of conduct

provisions, that comply with section 19

of the Exchange Act and Rule 19b–4

thereunder and which would be, if

approved by the Commission, sufficient

to effect the changes required by this

undertaking.

c. Each respondent exchange shall act

jointly with all other options exchanges

to amend the Plan for Reporting of

Consolidated Options Last Sale Reports

and Quotation Information (‘‘Plan’’) no

later than one year after the date of this

Order, so as to modify the structure and

operation of the Options Price Reporting

Authority (‘‘OPRA’’) in a manner that (i)

establishes a system for procuring and

allocating options market data

transmission capacity (‘‘capacity’’) that

eliminates joint action by the

participants in OPRA in determining the

amount of total capacity procured and

the allocation thereof, and provides that

each participant in OPRA will

independently determine the amount of

capacity it will obtain; (ii) establishes a

system for gathering and disseminating

business information from and to

participants of OPRA such that all

nonpublic information specific to a

participant in OPRA shall remain

segregated and confidential from other

participants (except for information that

may be shared in connection with

activities permitted under Section

3.c.(iii) hereof); and (iii) sets forth a

statement of OPRA’s functions and

objectives, as permitted under the

Exchange Act, and provides for rules

and procedures that limit any joint

action with respect to OPRA by the

participants in OPRA to circumstances

in which such joint action is necessary

in order to fulfill the stated functions

and objectives. As part of its compliance

with this undertaking, each respondent

exchange shall, acting jointly with all

other options exchanges, discuss,

develop, and provide to the Commission

staff, no later than six months after the

date of the Order, draft proposed

amendments to the Plan, pursuant to

and in compliance with Section 11A of

the Exchange Act, which would be, if

approved by the Commission, sufficient

to effect the changes detailed above in

this undertaking no later than one year

from the date of this Order; provided,

however, that in the absence of joint

agreement after a good faith effort to

reach joint agreement, each respondent

exchange shall individually provide to

the Commission staff, no later than

seven months after the date of the

Order, draft proposals reasonably

designed to effect the changes required

by this undertaking.

d. Pursuant to Section 17(b) of the

Exchange Act and Rule 17a–1(c)

promulgated thereunder, each

respondent exchange shall

Federal Register / Vol. 65, No. 187 / Tuesday, September 26, 2000 / Notices 57841

10The AMEX, the CBOE and the PHLX have

adopted new, or amended existing, rules required

by this undertaking IV.B.g.

11The AMEX and the CBOE have adopted new,

or amended existing, rules required by this

undertaking IV.B.h(ii).

simultaneously provide to the Directors

of the Divisions of Enforcement and

Market Regulation, and of the Office of

Compliance Inspections and

Examinations, all reports and

documents provided by such

respondent exchange to the Antitrust

Division of the U.S. Department of

Justice (‘‘D.O.J.’’) pursuant to such

respondent exchange’s settlement of a

civil action instituted by D.O.J.

substantially contemporaneously with

the institution of this proceeding.

e. Each respondent exchange shall,

acting jointly with all other options

exchanges, design and implement a

consolidated options audit trail system

(‘‘COATS’’), as specified below, that

will enable the options exchanges to

reconstruct markets promptly,

effectively surveil them and enforce

order handling, firm quote, trade

reporting and other rules. Specifically,

each respondent exchange, acting

jointly with all other options exchanges,

shall: (i) No later than six months after

the date of the Order, synchronize its

trading and supporting systems time

clocks with all other options exchanges;

(ii) no later than nine months after the

date of the Order, design and implement

a method to merge all options

exchanges’ reported and matched

transaction data on a daily basis and

disseminate this merged data among all

options exchanges using a uniform

computer-readable format (the

‘‘common computer format’’); (iii) no

later than twelve months after the date

of the Order, incorporate its own quotes

and the National Best Bid and Offer as

displayed in its market with the merged

transaction data (‘‘merged transactions

and quotations data’’) in such a manner

that it could be promptly retrieved and

readily merged in the common

computer format with other options

exchanges’ merged transactions and

quotations data; (iv) no later than

eighteen months after the date of the

Order, design and implement an audit

trail that provides an accurate, timesequenced record of electronic orders,

quotations, and transactions on such

respondent exchange, beginning with

the receipt of an electronic order by

such respondent exchange, and further

documenting the life of the order

through the process of execution, partial

execution, or cancellation of that order,

which audit trail shall be readily

retrievable in the common computer

format; and (v) no later than twenty-four

months after the date of the Order,

incorporate into the audit trail all nonelectronic orders (such that the audit

trail provides an accurate, timesequenced record of electronic and

other orders, quotations and

transactions on such respondent

exchange, beginning with the receipt of

an order by such respondent exchange

and further documenting the life of the

order through the process of execution,

partial execution, or cancellation of that

order, which audit trail shall be readily

retrievable in the common computer

format. Concurrently with the design of

each part of COATS, each respondent

exchange shall also design effective

surveillance systems, or effectively

enhance existing surveillance systems,

to use the newly available COATS data

to enforce the federal securities laws

and such exchange’s rules, and shall

promptly implement such surveillance

systems after implementing the

corresponding part of COATS. As part

of its compliance with this undertaking,

each respondent exchange shall, acting

jointly with all other options exchanges,

discuss, develop and provide to the

Commission staff, at least 90 days before

the respective deadlines for items (i)

through (v) above, a draft proposed

plan, or draft proposed rules or rule

amendments relating to the item that is

the subject of the deadline which

comply with Section 19 of the Exchange

Act and Rule 19b–4 thereunder, and

which would be, if approved by the

Commission, sufficient to effect the

changes required by each of these items;

provided, however, that in the absence

of joint agreement after a good faith

effort to reach joint agreement, each

respondent exchange shall individually

provide to the Commission staff, at least

60 days before the deadlines above, a

draft proposed plan, or draft proposed

rules or rule amendments reasonably

designed to effect the changes required

by each of those items of this

undertaking.

f. Each respondent exchange shall

promptly enhance and improve its

surveillance, investigative and

enforcement processes and activities

with respect to options order handling

rules, including, the duty of best

execution with respect to the handling

of orders after the broker-dealer routes

the order to such respondent exchange,

compliance with limit order display

rules, priority rules, trade reporting and

firm quote rules.

g. No later than six months after the

date of this Order, each respondent

exchange shall adopt new, or amend

existing, rules that require trades to be

reported within 90 seconds, or less, of

the time of execution of the trade. As

part of its compliance with this

undertaking, each respondent exchange

shall provide to the Commission staff,

no later than 120 days after the date of

the Order, draft proposed rules or rule

amendments that comply with Section

19 of the Exchange Act and Rule 19b–

4 thereunder and that would be, if

approved by the Commission, sufficient

to effect the changes required by this

undertaking.10

h. Each respondent exchange shall:

(i) no later than one year after the date

of this Order, adopt new, or amend

existing, rules concerning its automated

quotation and execution systems which

(aa) substantially enhance incentives to

quote competitively and substantially

reduce disincentives for market

participants to act competitively; and

(bb) specify the circumstances, if any,

under which automated execution

systems can be disengaged or operated

in any manner other than the normal

manner set forth in the exchange’s rules

and require the documentation of the

reasons for each decision to disengage

an automated execution system or

operate it in any manner other than the

normal manner. As part of its

compliance with this undertaking, each

respondent exchange shall provide to

the Commission staff, no later than six

months after the date of the Order, draft

proposed rules or rule amendments that

comply with Section 19 of the Exchange

Act and Rule 19b–4 thereunder and that

would be, if approved by the

Commission, sufficient to effect the

changes required by this undertaking.

(ii) no later than six months after the

date of this Order, adopt rules, rule

amendments or interpretations, or code

of conduct provisions approved by the

Commission, that expressly prohibit

harassment, intimidation, refusals to

deal and retaliation by exchange

members, or by officers, directors,

governors, employees, committee

members, and other officials and agents

of such exchange, against exchange

members or other market participants

for acting, or seeking to act,,

competitively. As part of its compliance

with this undertaking, each respondent

exchange shall provide to the

Commission staff, no later than 120 days

after the date of the Order, draft

proposed rules, rule amendments or

interpretations, and/or code of conduct

provisions, that comply with Section 19

of the Exchange Act and Rule 19b–4

thereunder and that would be, if

approved by the Commission, sufficient

to effect the changes required by this

undertaking.11

(iii) promptly enhance and improve

its surveillance, investigative and

57842 Federal Register / Vol. 65, No. 187 / Tuesday, September 26, 2000 / Notices

12The amounts specified for each respondent do

not reflect any determination of a respondent’s

relative degree of culpability with respect to the

conduct alleged in the Order.

13 If, over the course of calendar 2000 or 2001, the

Board of Governors or Directors of a respondent

exchange believe that the specified expenditures are

not achievable or feasible, or are unwarranted in

light of changed circumstances, such respondent

exchange may, by application to the Commission,

seek modification of this undertaking.

enforcement processes and activities

with a view to preventing and

eliminating (aa) harassment,

intimidation, refusals to deal and

retaliation against market participants,

for acting competitively, or seeking to

act competitively, and (bb) other

anticompetitive conduct.

i. No later than one year after the date

of this Order, each respondent exchange

shall adopt rules establishing, or

modifying existing, sanctioning

guidelines such that they are reasonably

designed to effectively enforce

compliance with such exchange’s

options order handling rules, including,

the duty of best execution with respect

to the handling of orders after the

broker-dealer routes the order to such

respondent exchange, limit order

display, priority, firm quote, and trade

reporting rules. As part of its

compliance with this undertaking, each

respondent exchange shall provide to

the Commission staff, no later than nine

months after the date of the Order, draft

proposed rules or rule amendments that

comply with Section 19 of the Exchange

Act and Rule 19b–4 thereunder and that

would be, if approved by the

Commission, sufficient to effect the

changes required by this undertaking.

j. No later than twelve months after

the date of this Order, each respondent

exchange shall adopt new, or amend

existing, rules to include any practice or

procedure, not currently authorized by

rule, whereby market makers trading

any particular option class determine by

agreement the spreads or option prices

at which they will trade any option

class, or the allocation of orders in that

option class. As part of its compliance

with this undertaking, each respondent

exchange shall provide to the

Commission staff, no later than six

months after the date of the Order, draft

proposed rules or rule amendments that

comply with Section 19 of the Exchange

Act and Rule 19b–4 thereunder that

would be, if approved by the

commission, sufficient to effect the

changes required by this undertaking.

Each respondent exchange shall take all

reasonable steps within six months after

the date of this Order to promptly stop

any other such practice or procedure if

neither it nor a related practice or

procedure that would supersede the

existing practice or procedure, has been

submitted to the Commission for

approval or is not already authorized by

rule.

k. The rule changes adopted pursuant

to these undertakings shall not preclude

a respondent exchange from exercising

or enforcing an intellectual property

right in an option, or a license of an

intellectual property right in an option,

if another exchange proposes to list or

has listed the option and such

respondent exchange has a good faith

belief that the intellectual property right

or license thereof exists and the action

taken is consistent with the federal

securities laws and the Commission’s

rules, regulations and orders.

l. The respondent exchanges shall, for

each of calendar 2000 and 2001, expend

for options-related surveillance systems

and for staffing in the areas of optionsrelated surveillance, investigation and

enforcement, an annual amount that

equals or exceeds: (a) $11 million, in the

case of the AMEX; (b) $17 million, in

the case of the CBOE; (c) $6.5 million,

in the case of the PCX; and (d) $4

million in the case of the PHLX.12 This

undertaking shall be deemed fulfilled if

the average annual amount of a

respondent exchange’s expenditures in

calendar 2000 and 2001 required by this

undertaking equals or exceeds such

respondent exchange’s annual amount

specified earlier in this undertaking.

The fulfillment of this undertaking will

not necessarily be deemed sufficient to

satisfy any other undertakings in this

Order and the fulfillment of all other

undertakings shall be determined

independently of the fulfillment of this

undertaking.13

m. Each respondent exchange shall,

on the first three anniversaries after the

date of the Order, provide to the

Directors of the Divisions of

Enforcement and Market Regulation,

and of the Office of Compliance

Inspections and Examinations affidavits

or affirmations, detailing its progress in

implementing undertakings 3.f., 3.h.iii.,

and 3.1.

n. In evaluating a respondent

exchange’s compliance with these

undertakings, the Commission will

consider: (i) any rule proposals filed by

such respondent exchange since August

1, 1999, or any rules adopted by such

respondent exchange since August 1,

1999, which are relevant to the purposes

of any of the undertakings; and (ii) any

and all steps taken since August 1, 1999

by such respondent exchange to

enhance and improve its surveillance,

investigative and enforcement processes

and activities in any manner relevant to

the purposes of any of the undertakings.

The Order specifically notes any

instances in which the rules previously

proposed and adopted by a respondent

exchange, or the steps previously taken

by a respondent exchange to enhance

and improve its surveillance,

investigative and enforcement processes

and activities, shall be deemed to have

fulfilled a particular undertaking.

By The Commission.

Jonathan G. Katz,

Secretary.

[FR Doc. 00–24605 Filed 9–25–00; 8:45 am]

BILLING CODE 4410–11–M

DEPARTMENT OF JUSTICE

Antitrust Division

Notice Pursuant to the National

Cooperative Research and Production

Act of 1993—Cable Television

Laboratories, Inc.

Notice is hereby given that, on July

11, 2000, pursuant to Section 6(a) of the

National Cooperative Research and

Production Act of 1993, 15 U.S.C. 4301

et seq. (‘‘the Act’’), Cable Television

Laboratories, Inc. (‘‘CableLabs’’) has

filed written notifications

simultaneously with the Attorney

General and the Federal Trade

Commission disclosing changes in its

membership status. The notifications

were filed for the purpose of extending

the Act’s provisions limiting the

recovery of antitrust plaintiffs to actual

damages under specified circumstances.

Specifically, Buford Media Group,

Tyler, TX has been added as a party to

this venture.

No other changes have been made in

either the membership or planned

activity of the group research project.

Membership in this group research

project remains open, and CableLabs

intends to file additional written

notifications disclosing all changes in

membership.

On August 8, 1988, CableLabs filed its

original notification pursuant to Section

6(a) of the Act. The Department of

Justice published a notice in the Federal

Register pursuant to Section 6(b) of the

Act on September 7, 1988 (53 FR

34593).

The last notification was filed with

the Department on March 22, 2000. A

notice for this filing was published in

the Federal Register on August 9, 2000

(65 FR 48736 ).

Constance K. Robinson,

Director of Operations, Antitrust Division.

[FR Doc. 00–24608 Filed 9–25–00; 8:45 am]

BILLING CODE 4410–11–M