[Federal Register Volume 65, Number 187 (Tuesday, September 26, 2000)]
[Notices]
[Pages 57829-57842]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-24605]



[[Page 57829]]

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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price to buy and the best quoted price to sell an option), and repealed 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.
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    \1\Plaintiff 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.
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    (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

[[Page 57830]]

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

[[Page 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 non-defendant.
    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

[[Page 57832]]

    (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: ______.
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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

[[Page 57833]]

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.
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    \1\The 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.
---------------------------------------------------------------------------

    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.

[[Page 57834]]

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

[[Page 57835]]

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\
---------------------------------------------------------------------------

    \2\The Intermarket Surveillance Group is an exchange 
organization formed to detect illegal activity occurring across the 
options exchanges.
---------------------------------------------------------------------------

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 
non-compliance.
    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 semi-annually 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

[[Page 57836]]

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,
---------------------------------------------------------------------------

    \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 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.


[[Page 57837]]


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[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. 
para.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\
---------------------------------------------------------------------------

    \4\United 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).

    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. 
Sec. 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 Sec. 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:
---------------------------------------------------------------------------

    \1\The 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. 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

[[Page 57838]]

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 self-regulatory 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 self-regulatory 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 self-regulatory 
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.
---------------------------------------------------------------------------

    \2\17 CFR 240.19c-5.
---------------------------------------------------------------------------

    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:
---------------------------------------------------------------------------

    \3\For 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.
---------------------------------------------------------------------------

    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 Joint-Exchange 
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

[[Page 57839]]

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.
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    \4\Sections 19(g) and 19(h) of the Exchange Act, 15 U.S.C. 
Secs. 78s(g) and 78s(h).
---------------------------------------------------------------------------

    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.
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    \5\With 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.
    \6\Firm quote rules require specialists or market makers to 
trade specified minimum numbers of options at the prices they quote.
    \7\The 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.
---------------------------------------------------------------------------

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. Bid-ask 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.
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    \8\The ``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.
---------------------------------------------------------------------------

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:

[[Page 57840]]

    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.
---------------------------------------------------------------------------

    \9\The AMEX and the CBOE have adopted new, or amended existing, 
rules required by this undertaking IV.B.b.(iv).
---------------------------------------------------------------------------

    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

[[Page 57841]]

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, time-sequenced 
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 non-electronic orders (such that the audit trail 
provides an accurate, time-sequenced 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\
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    \10\The AMEX, the CBOE and the PHLX have adopted new, or amended 
existing, rules required by this undertaking IV.B.g.
---------------------------------------------------------------------------

    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\
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    \11\The AMEX and the CBOE have adopted new, or amended existing, 
rules required by this undertaking IV.B.h(ii).
---------------------------------------------------------------------------

    (iii) promptly enhance and improve its surveillance, investigative 
and

[[Page 57842]]

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 options-related 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\
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    \12\The 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.
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    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