75564 Federal Register / Vol. 65, No. 232 / Friday, December 1, 2000 / Notices

1 15 U.S.C. 78k–1.

2The OPRA Plan for Reporting of Consolidated

Options Last Sale Reports and Quotation

Information (‘‘OPRA Plan’’) is a national market

system plan approved by the Commission pursuant

to Section 11A of the Act and Rule 11Aa3–2

thereunder. See Securities Exchange Act Release

No. 17638 (March 18, 1981). The OPRA Plan

provides for the collection and dissemination of last

sale and quotation information on options that are

traded on the participant exchanges. The five

signatories to the OPRA Plan that currently operate

an options market are the American Stock Exchange

(‘‘Amex’’); the Chicago Board Options Exchange

(‘‘CBOE’’); the International Securities Exchange

(‘‘ISE’’); the Pacific Exchange (‘‘PCX’’); and the

Philadelphia Stock Exchange (‘‘Phlx’’). The New

York Stock Exchange is a signatory to the OPRA

Plan, but sold its options business to the CBOE in

1997. See Securities Exchange Act Release No.

38542 (April 23, 1997), 62 FR 23521 (April 30,

1997).

3Currently, OPRA systems capacity is 8,000

messages per second, while the exchanges’ peak

demand to date has approached 3,700 messages per

second.

4 In May 2000, the Commission proposed

amendments to the OPRA Plan to allocate OPRA

systems capacity among the options exchanges

during peak usage periods. See Securities Exchange

Act Release No. 42755 (May 4, 2000), 65 FR 30148

(May 10, 2000) (‘‘Proposing Release’’).

5See Section 11A(a)(1)(C)(ii) of the Act, 15 U.S.C.

78k–1(a)(1)(C)(ii).

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–43621; File No. 4–434]

RIN 3235–AH92

Options Price Reporting Authority

AGENCY: Securities and Exchange

Commission.

ACTION: Adoption of amendments to

national market system plan.

SUMMARY: The Securities and Exchange

Commission (‘‘SEC’’ or ‘‘Commission’’)

is adopting amendments to the Options

Price Reporting Authority Plan for

Reporting of Consolidated Options Last

Sale Reports and Quotation Information.

The amendments establish a formula, as

a short-term solution to OPRA capacity

shortages, to allocate the message

capacity of the OPRA system among the

participant exchanges during peak usage

periods.

EFFECTIVE DATE: January 2, 2001.

FOR FURTHER INFORMATION CONTACT:

Deborah Flynn, Senior Special Counsel,

at (202) 942–0075; Kelly Riley, Special

Counsel, at (202) 942–0752; John

Roeser, Attorney, at (202) 942–0762;

Terri Evans, Special Counsel, at (202)

942–4162; or Heather Traeger, Attorney,

at (202) 942–0763, Division of Market

Regulation, Securities and Exchange

Commission, 450 Fifth Street, N.W.,

Washington, D.C. 20549–1001.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Executive Summary

II. Background

III. Description of Proposal

IV. Description of Amendments Being

Adopted

V. Discussion

A. Introduction

B. Comments on Commission’s Proposal to

Allocate Capacity

1. Comments on Proposed Methods of

Incorporating a Measure of Quoting

Efficiency into the Allocation of Capacity

2. Comments on Capacity Allocation Only

for Classes in Which an Exchange Has a

Minimum Level of Trading Volume

3. Comments on Allocating Capacity

Equally Among the Options Exchanges

4. Comments on Rewarding Quality of

Quotes

5. Comments on Anticompetitive Aspects

of Allocation Formula

6. Comments About New Exchanges

VI. Costs and Benefits of the OPRA Plan

Amendment

A. Response to Comments

B. Benefits

C. Costs

D. Conclusion

VII. Effects on Competition, Efficiency, and

Capital Formation

VIII. Summary of Final Regulatory Flexibility

Analysis

IX. Conclusion

X. Description of Amendments to the OPRA

Plan

I. Executive Summary

In Section 11A of the Securities

Exchange Act of 1934 (‘‘Act’’), Congress

directed the Commission to assure,

among other things, the availability to

broker-dealers and investors of

quotation and transaction information

in securities.1 It is this directive that

makes transparency and, in particular,

the real-time, public dissemination of

trade and quotation information a

central feature of the U.S. securities

markets. Accordingly, participants in

the options markets today have access to

a consolidated stream of quotation and

transaction information for any of the

thousands of options classes that trade.

This transparency, in turn, contributes

to efficient price discovery, offsets the

fragmentation of buying and selling

interest on multiple exchanges, and

facilitates the best execution of

customers’ orders by broker-dealers.

Market information, however, is only

of use to market participants if it is

disseminated in a timely fashion.

Unfortunately, the amount of market

data generated by the options markets is

dangerously close to exceeding the

capacity of the Options Price Reporting

Authority (‘‘OPRA’’) system to do this.2

In fact, prior to recent increases in

OPRA capacity, there have been periods

when the amount of options market data

sent by the exchanges to OPRA

exceeded OPRA capacity to publicly

disseminate it on a real-time basis.

When this occurs, the only market

participants with up-to-date quote and

trade information are those physically

on the floor of a particular exchange.

Those participants then have an

informational advantage over

participants—including investor—not

physically on the particular exchange

floor. This result reduces market

transparency, impedes efficient price

discovery, and is inconsistent with the

goal of fair competition among brokers

and dealers and exchange markets.

During the past year, the options

exchanges have agreed, on an ad hoc

basis, to allocate OPRA capacity among

themselves when demand for the scarce

capacity exceeds the supply available.

Currently, however, the options

exchanges do not have an agreement on

how to limit the amount of market data

each will send to OPRA. Because OPRA

has recently expanded its capacity to

8,000 messages per second, there have

been no strains on OPRA capacity.3

Nevertheless, the full implementation of

decimal pricing, the dissemination of

quotations with size, and the complete

roll-out of ISE’s new listings, is

expected to once again strain OPRA

capacity limits.

For this reason, the Commission is

adopting amendments to the OPRA Plan

to allocate, among the options

exchanges, OPRA’s peak period message

handling capacity.4 The Commission

believes that these amendments are

necessary because of the OPRA

participants’ inability to agree on how to

allocate capacity among themselves and

the inability to increase ORPA’s systems

capacity within the short-term to a level

sufficient to permit the exchanges to

generate message traffic without

restraint. The allocation of OPRA

capacity among the exchanges

effectively puts a cap on the number of

messages that each exchange can send

to OPRA when the exchanges’ aggregate

demand for OPRA capacity exceeds its

supply. Only by limiting each exchange

to a maximum number of messages per

second that it can send to OPRA, during

periods when the demand on OPRA

systems capacity exceeds the supply,

will all broker-dealers and investors

have available to them accurate and

timely information with respect to

quotations for and transactions in

options. Further, the Commission

believes that the formula it is adopting

today allocates capacity in a more

objective and transparent manner, is

consistent with the statutory objectives

of fair competition among markets,5 and

assures the availability to brokers,

dealers, and investors of information

Federal Register / Vol. 65, No. 232 / Friday, December 1, 2000 / Notices 75565

6See Section 11A(a)(1)(C)(iii) of the Act, 15

U.S.C. 78k–1(a)(1)(C)(iii).

7See In the Matter of Certain Activities of

Options Exchanges, Securities Exchange Act

Release No. 43268, September 11, 2000;

Administrative Proceeding File No. 3–10282 (‘‘SEC

Order’’).

8 15 U.S.C. 78k–1(a)(2) and 15 U.S.C. 78k–

1(a)(3)(B); see also Securities Exchange Act Release

No. 17638 (March 18, 1981), as amended; see, e.g.,

Securities Exchange Act Release No. 40767

(December 9, 1998), 63 FR 69354 (December 16,

1998).

9 In 1976, the Commission approved OPRA’s

registration as a securities information processor.

See Securities Exchange Act Release No. 12035

(January 22, 1976), 41 FR 4372.

10A series is a class of options, either all puts or

all calls, on the same underlying security that have

the same exercise price and maturity date.

11For example, in February 2000, the average

number of quotes per day was 37.5 million, while

the average number of trades per day was 183,000.

12As discussed below, this tremendous increase

in message traffic may be attributed, in part, to the

increased volume on the exchanges, increased

volatility in the underlying equity securities, and

increased multiple trading of previously

exclusively-traded options products across the

options exchanges. Dramatic growth in options

quote message traffic is expected to continue in the

near future as ISE continues its roll-out of the top

600 most actively-traded options classes, products

begin to trade in decimals rather than fractions, and

quotes are disseminated with size.

13OPRA systems capacity was expanded to 5,000

messages per second, and subsequently, 8,000

messages per second, on July 17, 2000 and October

2, 2000, respectively. Planned enhancements to the

OPRA system are expected to increase total systems

capacity to 12,000 messages per second by yearend.

14See Securities Exchange Act Release Nos.

42328 (January 11, 2000), 65 FR 2988 (January 19,

2000) (order approving File No. SR–OPRA–00–01);

42362 (January 28, 2000), 65 FR 5919 (February 7,

2000)(order approving file No. SR–OPRA–00–02);

42493 (March 3, 2000), 65 FR 12597 (March 9,

2000)(order approving File No. SR–OPRA–00–03).);

42779 (May 12, 2000), 65 FR 31950 (May 19,

2000)(order approving File No. SR–OPRA–00–04);

42849 (May 26, 2000), 65 FR 36180 (June 7,

2000)(order approving File No. SR–OPRA–00–05);

and 43063 (June 21, 2000), 65 FR 46752 (July 31,

2000)(order approving File No. SR–OPRA–00–07)

with respect to quotations for and

transactions in options.6

Although a capacity allocation

formula inhibits exchanges’ ability to

generate and send to OPRA unlimited

quotations, this is a direct consequence

of insufficient OPRA capacity to handle

peak message volumes. In this context,

the Commission must balance this

concern against investors’ and other

market participants’ interest in having

timely and reliable market information

to use to make informed investment and

trading decisions. The Commission is

adopting these amendments as a shortterm solution and only after the OPRA

participants themselves have been

unable to reach agreement on an

objective capacity allocation formula.

As a more permanent solution, the

Amex, CBOE, PCX, and Phlx have

consented, as part of their settlement of

an enforcement action with the

Commission, to, among other things,

modify the organizational structure and

operation of OPRA so that each

exchange will independently determine

the amount of capacity that it will

obtain.7

II. Background

In 1981, the Commission approved

the OPRA Plan as a national market

system plan, pursuant to Sections

11A(a)(2) and 11A(a)(3)(B) of the Act.8

The OPRA Plan governs the process by

which options market data are collected

from participant exchanges,

consolidated, and disseminated.9

Consolidated data, when it is

disseminated in a timely manner, enable

broker-dealers and investors to know

the best price that is currently available

for a particular product. It assists

customers in setting the terms of their

orders and in monitoring how well their

brokers execute their orders.

Consolidated data also assist investors’

brokers to obtain, as well as exchange

market makers and specialists to

provide, the best execution possible for

an order.

The OPRA policy committee

composed of representatives from each

participant exchange implements and,

subject to Commission approval,

amends the policies and procedures set

forth in the OPRA Plan. The OPRA

committee selected the Securities

Industry Automation Corporation

(‘‘SIAC’’) as the facility for gathering the

last sale and quote information from

each of the participant exchanges and

consolidating and disseminating such

data to approved vendors. All of the

transactions executed on, and price

quotations for options generated by,

each options exchange are

communicated to the public by OPRA

through the facilities of its exclusive

processor, SIAC. The messages are sent

to OPRA and distributed to market data

vendors on a consolidated basis for use

by options market participants,

including retail investors, brokerdealers, and the exchanges themselves.

Each trade that is executed on an

options exchange, as well as each price

change quoted on an options exchange,

is reported to OPRA as a ‘‘message.’’

The options markets generate messages

for a substantial number of products.

Currently, there are approximately 3,900

equity securities and indexes

underlying listed options products, and

more than 178,000 individual options

series.10 Trade and quote data are

generated continuously during the

hours that markets are open for each

options product listed on each options

exchange.

Quote message traffic represents the

vast majority of the options message

traffic generated.11 Generally, quotes are

generated automatically for individual

options series based on changes in the

underlying stock price or index value.

In other words, every time a price

changes for a particular equity security,

the quotes for all of the options on that

security or an index in which that

security is represented may be

automatically updated on each

exchange that trades those options. This

enormous amount of quote message

traffic burdens the OPRA system, and

threatens to compromise the reliability

of options market data disseminated to

market participants, including retail

investors.

The number of messages generated by

the exchanges on a daily basis has been

growing exponentially. In January 1999,

OPRA reported an average of only about

17 million messages per day. By January

2000, OPRA reported an average of 40

million messages per day.12 As options

message traffic has increased over the

last few years, OPRA has directed SIAC

to implement systems enhancements to

accommodate the additional message

traffic. Over the last year, however, it

has become increasingly apparent that

the message traffic expected to be

generated by the options exchanges

cannot be accommodated by the

planned enhancements to the OPRA

system.13

The options exchanges have,

individually, implemented a number of

internal quote message mitigation

strategies and the Commission expects

the options exchanges to continue to

consider and implement other quote

message mitigation strategies as both

long-term and short-term solutions.

Nonetheless, quote message traffic

continues to strain OPRA systems

capacity. The options exchanges have

responded to this capacity crisis by

agreeing to allocate existing OPRA

systems capacity among themselves

during peak periods, while continuing

to work on other short-term mitigation

strategies, such as delisting classes with

little or no open interest and developing

a system that would only disseminate

quotes upon request for inactive options

classes. To date, the options markets

have agreed, on six occasions, to

allocate the then-existing OPRA systems

capacity among themselves during peak

periods through temporary amendments

to the OPRA Plan.14 The capacity

allocations implemented by the options

exchanges over the past nine months

have been based loosely on the

historical peaks experienced by each

75566 Federal Register / Vol. 65, No. 232 / Friday, December 1, 2000 / Notices

15See Section 11A(a)(1)(C)(iii) of the Act, 15

U.S.C. 78k–1(a)(1)(C)(iii).

16Consequently, the options exchanges currently

are not operating under a capacity allocation plan.

See letter from Joseph Corrigan, Executive Director,

OPRA, to Deborah Flynn, Senior Special Counsel,

Division of Market Regulation, Commission, dated

September 25, 2000.

17See supra note .

18See Proposing Release, supra note 4.

19As described below, however, an options

exchange that begins trading for the first time will

receive an allocation of capacity equal to 40% of

OPRA systems capacity divided by the total number

of options exchanges. For each quarter thereafter, an

exchange operating for fewer than 270 calendar

days elects to receive this fixed allocation, or to

receive an allocation based on the same formula as

applied to other exchanges. See OPRA Plan, Section

V (d) and (e). The equal portion of one-third of

available OPRA systems capacity will be calculated

using the total number of options exchanges, even

though allocated only to those exchanges that do

not receive a fixed new exchange allocation. See

OPRA Plan, Section V (d)(ii).

20See Section 11A(a)(1)(C)(ii) and (iii) of the Act,

15 U.S.C. 78k-1(a)(1)(C)(ii) and (iii).

21See Proposing Release supra note .

22For purposes of the formula, the term

‘‘customer contract’’ is defined as an options

options market, and determined through

negotiations among the markets. The

options exchanges have, however, been

unable to agree to anything other than

short-term, ad hoc allocations that failed

to ensure the continued availability of

quote and trade information to other

market participants 15 by providing

incentives for the exchanges to reduce

excessive quoting of existing listings

and to add new listings only when there

was a sound business rationale. The

options exchanges, however, failed to

agree to an allocation of capacity

following the expiration of the most

recent temporary amendment to the

OPRA Plan.16 As noted above, pursuant

to the SEC Order, the Amex, CBOE,

PCX, and Phlx are required, to act

jointly with the ISE, by September 11,

2001, to amend the OPRA Plan to

modify the structure and operation of

OPRA so that each exchange will

independently determine the amount of

capacity that it will obtain.17 Because

the Commission is concerned that the

options exchanges will be unable, in the

near future, to agree on how to allocate

capacity for the period prior to

development and implementation of a

means for each exchange to contract for

its own planned capacity requirements,

the Commission is adopting these

amendments to the OPRA Plan as a

methodology by which the limited

OPRA systems capacity available will be

allocated.

III. Description of Proposal

In May 2000, the Commission

proposed two alternative capacity

allocation formulae, briefly described

below, to be used in the short-term to

allocate OPRA systems capacity among

the options exchanges during peak

usage periods.18

Proposed Alternative A was based on

the concept that an exchange should

receive a portion of the available

systems capacity only for those options

classes in which the exchange’s trading

reached a minimum threshold

(‘‘Included Classes’’). The Commission

proposed that an options class be

considered an Included Class for an

exchange, if during a three-month

period, that exchange traded an average

of: (1) 15 trades per day, if the class is

multiply-listed, or (2) 30 trades per day,

if the class is exclusively-listed. The

Commission requested comment on the

proposed definition of Included Class.

Capacity would then be allocated during

peak periods to each exchange for

which an options class is an Included

Class based on the average quotation

volume across all markets for which the

particular class was an Included Class

during the first half-hour of the trading

day. To permit new entrants a fair

opportunity to compete with existing

exchanges, the Commission’s Proposed

Alternative A provided that all options

classes listed on an exchange that had

been operating for fewer than nine

months be Included Classes.

Proposed Alternative B was based on

an equal allocation of OPRA systems

capacity among the options exchanges,

with adjustments based on the

exchange’s ratio of total quotes to its

total contract volume. The fewer quotes

per contract traded on an exchange, the

greater the allocation that exchange

would receive. To allow exchanges to

list new options classes without being

penalized in the determination of how

capacity is allocated, any options

classes listed by an exchange during the

preceding calendar quarter would be

excluded from the ratio calculation. The

equal allocation would be adjusted by

an exchange’s deviation from the

average ratio of total quotes to its total

contract volume, multiplied by a

dampening factor. The Commission

proposed that the dampening factor be

10% for the first adjustment calculation.

If, after the first calculation, any

exchange’s capacity allocation fell

below a pre-determined minimum,

which the Commission proposed to be

15% of all OPRA capacity, the

dampening factor would be reduced by

one percent and an adjustment

recalculation performed. Recalculations

would continue, reducing the

dampening factor by 1% for each

successive recalculation, until all

exchanges have at least the predetermined minimum capacity

allocation.

IV. Description of Amendment Being

Adopted

The capacity allocation formula

adopted today, which will be calculated

quarterly and applied only when the

exchanges’ demand for OPRA capacity

exceeds its supply, combines a number

of elements found in the two alternative

formulae proposed by the Commission,

and incorporates several modifications

recommended by commenters. The

Commission recognizes that there is no

one ideal capacity allocation

methodology and, therefore, as

suggested by one commenter, has

determined to divide OPRA systems

capacity into separate portions and

allocate those portions based on

different criteria.

The formula adopted by the

Commission allocates an equal portion

of one-third of available OPRA systems

capacity to each options exchange.19

This means that if there are five options

exchanges, each exchange would have

available at least 533 messages per

second with the current 8,000 message

per second capacity of OPRA. When

OPRA capacity is expanded to 12,000

messages per second, as it is expected

to be by year-end, each exchange would

have available at least 800 messages per

second. While this amount of capacity

may not be sufficient to fully satisfy any

of the exchanges’ capacity needs, the

Commission believes it is a fair amount

of capacity to be allocated solely on the

basis of being a registered exchange

operating an options market. The

Commission believes that it is important

to assure each options exchange at least

a minimum amount of capacity to

disseminate its market data, in order for

the formula being adopted today to be

consistent with the statutory objectives

of fair competition and the availability

to brokers, dealers, and investors of

information with respect to quotations

for and transactions in securities.20

The capacity remaining after the

allocation described above and any

allocation to new exchanges as

described below, will be allocated

among the exchanges based upon a

variation of Proposed Alternative A, as

set forth in the Proposing Release.21

Specifically, this remaining OPRA

systems capacity will be allocated to the

exchanges based on the average

quotation message traffic generated

during the last full hour of the trading

day, 3 p.m. to 4 p.m. eastern time. An

exchange will receive an allocation only

for those options classes for which at

least a minimum number of customer

contracts 22 are traded on that exchange.

Federal Register / Vol. 65, No. 232 / Friday, December 1, 2000 / Notices 75567

contract executed on an options exchange and

cleared in a customer account at a registered

clearing agency. See OPRA Plan, Section III (m).

23The exchange’s average daily contract volume

in an options class will be calculated based on the

number of trading days such class is listed on such

exchange during the calendar quarter.

24The term ‘‘options class’’ is defined in OPRA

Plan, Section III (n), and includes options on groups

or indexes of securities.

25 If an options exchange begins to trade other

than on the first of February, May, August, or

November, each other options exchange’s capacity

will be recalculated pursuant to Section V (d)(ii)(B)

of the OPRA Plan, using data from the most recent

calendar quarter, except that any options exchange

that was qualified for, and elected to receive, the

New Exchange Share in the most recent quarterly

allocation, will receive a New Exchange Share. See

OPRA Plan, Section V(e).

26Because a new exchange that has been

operating for fewer than 270 days will make, on the

fifth business day following the end of a calendar

quarter, its election for the next allocation period,

a New Exchange Share may be allocated to an

exchange for its first year of operation.

27 15 U.S.C. 78k–1.

28 In Section 11A(a)(1)(C)(iii) of the Act, Congress

found ‘‘that it is in the public interest and

appropriate for the protection of investors and the

maintenance of fair and orderly markets to assure

the availability to brokers, dealers, and investors of

information with respect to quotations for and

transactions in securities.’’ 15 U.S.C. 78k–

1(a)(1)(C)(iii).

29 15 U.S.C. 78k–(a)(3)(B).

30 17 CFR 240.11Aa3–2.

31 17 CFR 240.11Aa3–2(b)(2). Further, Paragraph

(c)(2) of Rule 11Aa3–2 requires that promulgation

of an amendment to an effective national market

system plan initiated by the Commission be by rule.

17 CFR 240.11Aa3–2(c)(2).

32 17 CFR 240.11Aa3–2.

33 17 CFR 240.11Aa3–2(c)(2).

34Pursuant to paragraph (c)(2) of Rule 11Aa3–2

under the Act, the Commission designates up to 180

days from the date of publication of notice of the

filing of an amendment to a national market system

plan for its approval of the amendment to the OPRA

Plan adopting a capacity allocation formula. The

Commission finds that, due to the complexity of

issues relating to adopting a formula to allocate

OPRA systems capacity between the options

exchanges during peak usage periods, it is

necessary and appropriate in the public interest, for

the protection of investors, and the maintenance of

fair and orderly markets to designate this longer

period. 17 CFR 240.11Aa3–2.

35See letters to Jonathan G. Katz, Secretary,

Commission, from Joseph B. Stefanelli, Executive

Vice President, Derivative Securities, AMEX,

Commission, dated July 28, 2000 (‘‘Amex Letter’’);

Edward J. Joyce, President and Chief Operating

Officer, CBOE, dated June 9, 2000 (‘‘CBOE Letter’’);

Michael J. Simon, Senior Vice President and

General Counsel, ISE, dated June 9, 2000 (‘‘ISE

Letter’’); James J. Bowe, Senior Executive Vice

President Options, PCX, dated August 3, 2000

(‘‘PCX Letter’’); Meyer S. Frucher, Chairman and

Chief Executive Officer, Phlx, dated June 12, 2000

(‘‘Phlx Letter’’); Joel L. Bohm, General Counsel and

Corporate Secretary, SIAC, dated June 8, 2000

(‘‘SIAC Letter’’); Joel Greenberg, Susquehanna

Partners, GP, dated June 9, 2000 (‘‘Susquehanna

Letter’’); and Chris Delzio, dated June 7, 2000. A

full summary of comments received on the

proposed amendments to the OPRA Plan is

available in the Commission’s Public Reference

Room (File No. 4–434).

36See Amex Letter; ISE Letter; Phlx Letter; and

SIAC Letter.

The formula does not allocate capacity

to an exchange for a particular options

class in which the exchange’s average

daily contract volume 23 does not

exceed 15 customer contracts for

multiply-listed options classes and 25

customer contracts for exclusively-listed

options classes.24 Exchanges will not be

given additional capacity for new

listings that do not trade the minimum

number of customer contracts set forth

above.

Because new exchanges may not have

had time to develop their business to

attract a sufficient number of customer

contracts to meet the minimum

customer contract volume set forth

above, instead of receiving an allocation

of capacity based on the formula

described above, new exchanges will

receive during their first quarter of

operation, and may elect to receive

thereafter, an allocation of OPRA

systems capacity slightly greater than an

equal portion of one-third of available

capacity. Specifically, an options

exchange that has been operating for

fewer than 270 calendar days may

choose to receive a capacity allocation

(1) equal to 40% of available OPRA

systems capacity divided by the total

number of options exchanges (‘‘New

Exchange Share’’); or (2) based on the

same formula used to determine the

capacity allocated to all other

exchanges. A new options exchange will

make an election five business days

following the end of a calendar quarter

regarding which method under which it

wishes to receive a capacity allocation.

During a new exchange’s first quarter of

operation, or any portion thereof, it will

receive an allocation equal to 40% of

available capacity divided by the total

number of options exchanges.25 New

markets will be treated the same as

existing exchanges after the end of their

first year of operation.26

V. Discussion

A. Introduction

In Section 11A of the Act,27 Congress

directed the Commission to facilitate the

development of a national market

system consistent with the objectives of

the Act.28 In particular, Section

11A(a)(3)(B) of the Act authorizes the

Commission ‘‘by rule or order, to

authorize or require self-regulatory

organizations to act jointly with respect

to matters as to which they share

authority under this title in planning,

developing, operating, or regulating a

national market system (or a subsystem

thereof) or one or more facilities.’’ 29 The

procedures regarding filing amendments

to a national market system plan are set

forth under Rule 11Aa3–2.30 Rule

11Aa3–2 permits the Commission, on its

own initiative, to propose amendments

to an effective national market system

plan,31 such as the OPRA Plan, and

establishes the procedures for doing

so.32 The Commission may adopt such

an amendment if it finds that the

amendment ‘‘is necessary or appropriate

in the public interest, for the protection

of investors and the maintenance of fair

and orderly markets, to remove

impediments to, and perfect the

mechanisms of, a national market

system, or otherwise in furtherance of

the purposes of the Act.’’ 33

The Commission proposed

amendments to the OPRA Plan on its on

initiative in accordance with Rule

11Aa2–3. After carefully considering the

issues raised by the comment letters, the

Commission is adopting an amendment

to the OPRA Plan that establishes a

formula for allocating OPRA systems

capacity among the OPRA participants

during peak usage periods.34 The

Commission notes that the capacity

allocation formula described in this

release should be necessary only for the

short-term. The Amex, CBOE, PCX, and

Phlx have committed, as part of their

settlement with the Commission, to act

jointly with the ISE, to modify by

September 11, 2001, the structure and

operation of OPRA so that each

exchange will independently determine

the amount of capacity that it will

obtain. Until implementation of this

new structure, however, the

Commission believes that the certainty

and objectivity of the capacity allocation

formula being adopted today is needed

to ensure that investors have available

timely and accurate options market

data. The possibility that options

exchanges will exceed the capacity

limits currently available jeopardizes

the timeliness and accuracy of options

market data and, consequently, the

protection of investors and the

maintenance of fair and orderly markets.

B. Comments on Commission’s Proposal

to Allocate Capacity

In response to the Proposing Release,

the Commission received eight

comment letters, representing the views

of the five options exchanges and three

other interested parties.35 Although

none of the commenters recommended

the adoption of the Commission’s

proposed alternatives, four commenters

generally supported the concept of an

allocation formula.36 Moreover, two

commenters generally supported the

concept of allocating OPRA systems

capacity based on the number of listings

on an exchange that satisfy a minimum

level of trading volume, as set forth in

75568 Federal Register / Vol. 65, No. 232 / Friday, December 1, 2000 / Notices

37See CBOE Letter and ISE Letter. 38See Phlx Letter and Amex Letter. 39See Phlx Letter and CBOE Letter. 40 Id. Another commenter proposed to address the

Commission’s concerns about OPRA system

capacity by allowing the dissemination of all

transaction prices, but quotations only for options

classes meeting minimum volume thresholds or

that have one of the three strike prices nearest to

the price of the underlying security. The PCX

argued that OPRA capacity should be targeted to

options series that are actively traded and that all

exchanges should be able to competitively quote

those series to provide investors with the most

competitive prices available. See PCX Letter. The

Commission believes that this approach would be

viable if the exchanges developed a system that

would disseminate a quote only upon request. In

the absence, however, of such a system, the

Commission does not believe that this approach is

consistent with Section 11A(c)(1)(B) of the Act. The

Commission continues to encourage the exchanges

to develop mitigation strategies, including the

development of a request-for-quote system.

41See Amex Letter; CBOE Letter; ISE Letter;

Susquehanna Letter; PCX Letter; and Phlx Letter.

42See Amex Letter; CBOE Letter; PCX Letter; and

ISE Letter.

43See CBOE Letter.

44See ISE Letter. This commenter noted that any

allocation formula should promote competition and

not in any way ‘‘lock in’’ or preserve the market

share of any options exchange. Instead of basing an

allocation formula on an exchange’s volume or

market share, which would prevent smaller or

newer markets from effectively competing against

exchanges with greater volume, this commenter

advocated an allocation formula based solely on the

products that an exchange trades. In addition, this

commenter emphasized the need to adopt an

allocation formula that would not perpetuate the

problem of the inefficient use of OPRA bandwidth.

45See Phlx Letter. This commenter did not,

however, recommend a more appropriate measure

of quoting efficiency. 46See Susquehanna Letter.

Proposed Alternative A.37 Two

commenters, on the other hand,

supported the concept of an equal

allocation of available capacity.38 As

discussed below, commenters generally

did not support Proposed Alternative B,

because of their opposition to the

proposed measure of quoting efficiency.

Two commenters stated that, in the long

term, OPRA capacity should not be

allocated based on a formula.39 Instead,

these commenters believed that each

options exchange should pay for the

amount of capacity that it requires.40

1. Comments on Proposed Methods of

Incorporating a Measure of Quoting

Efficiency into the Allocation of

Capacity

Both allocation formulae proposed by

the Commission incorporated a measure

of quoting efficiency. Proposed

Alternative A would have allocated

capacity during peak periods to an

exchange for which an options class was

considered an Included Class, based on

the average quotation volume during the

first half-hour of the trading day across

all markets for which such class was an

Included Class. Proposed Alternative B

would have adjusted an equal allocation

of capacity based on an exchange’s ratio

of quotes to its trading volume.

Several commenters opposed the

Commission’s proposed measures of

quoting efficiency set forth in Proposed

Alternative A and Proposed Alternative

B. With respect to Proposed Alternative

A, six of the commenters were opposed

to determining the average quoting

frequency of multiply-traded and

exclusively-traded options classes based

on the quoting activity that occurs

during the first half-hour after the

opening rotation, citing the difficulty in

obtaining such information for the

proposed time period.41 Four

commenters suggested the full trading

day, rather than the first half-hour, be

used for calculating average quoting

frequency, due to the effort that would

be required to process the required raw

data, the lack of clarity as to when a

particular market has completed its

opening rotation, and the potential for

manipulation.42

With respect to Proposed Alternative

B, one commenter expressed significant

opposition to the initial equal

allocation, arguing that the proposed

adjustments to this allocation based on

quoting efficiency were not significant

enough to adequately reward more

efficient exchanges.43 Another

commenter also raised concerns about

Proposed Alternative B, but for a

different reason. Specifically, this

commenter stated that the quote-tocontract volume aspect of Proposed

Alternative B would reward established

markets at the expense of new

exchanges attempting to compete for

market share by competitively

quoting.44

One commenter objected to the way

adjustments for quoting efficiency were

proposed to be made to the initial equal

allocation because it was based on an

inappropriate measure of quoting

efficiency.45 This commenter also

expressed concerns that using the quoteto-volume ratio as a measure of quoting

efficiency would discourage new

listings, have the effect of giving

different allocations to exchanges that

have the same quoting frequency, and

would generally impede competition by

providing high volume exchanges with

an advantage over new exchanges and

lower-volume exchanges.

Another commenter expressed

concerns that Proposed Alternative B

would result in market makers quoting

larger spreads to compensate for a

disincentive to adjust quotes based on

volatility in the underlying security. In

addition, this commenter argued that

Proposed Alternative B would favor

exchanges and options classes that have

a greater percentage of institutional

order flow, which could disadvantage

retail investors, and could result in a

disincentive to multiply-list options

classes. In this regard, this commenter

contended that aggressive quoting,

which could negatively affect an

exchange’s quote-to-contract ratio, is

necessary for a new market to attempt

to acquire market share in a multiplylisted options class.46

The allocation formula adopted by the

Commission today incorporates the

measure of quoting efficiency contained

in the Commission’s Proposed

Alternative A. That is, the exchanges

will receive a capacity allocation based

on the average quoting frequency of all

exchanges for which an options class is

an Included Class. Exchanges that quote

more frequently than the average will

not receive capacity equal to their past

usage. Exchanges that quote less

frequently will receive more capacity for

that options class than their past usage,

thus allowing them to use the extra

capacity to support a business in other

options classes, such as those which

may not have sufficient trading volume

to be an Included Class.

The Commission recognizes the merit

in commenters’ views that limiting the

capacity allocated to a particular

exchange based on relative quoting

frequency as proposed in Alternative A

may discourage market makers from

aggressively quoting and may favor

larger, more established exchanges that

do not need to aggressively quote to

advertise for order flow. The

Commission also agrees that there may

be circumstances in which exchanges

quoting with the same frequency may

receive different allocations of capacity

under the formula because one

exchange does not have enough trading

volume for particular options classes to

be Included Classes. Nonetheless, the

Commission believes that the formula

being adopted today strikes an

appropriate balance between the

capacity needs of higher volume

exchanges and that of newer and

smaller volume markets because it

combines the allocation of capacity

based on the number of Included

Classes on an exchange with the

allocation of an equal portion of onethird of available capacity, which

should ensure that newer and smaller

exchanges receive sufficient capacity to

actively compete for order flow. The

Commission also believes that it is

important to provide an incentive to

exchanges to avoid excessive quoting.

The Commission believes that the

allocation formula adopted today would

Federal Register / Vol. 65, No. 232 / Friday, December 1, 2000 / Notices 75569

47See ISE Letter; Phlx Letter; and Susquehanna

Letter. The Phlx argued that because proposed

Alternative A would provide no capacity allocation

to an exchange if activity in an option class on that

exchange failed to meet the volume thresholds to

be considered an Included Class, the proposal

would likely reduce competition by creating a

disincentive for exchanges to list options that are

already traded on other exchanges. This commenter

expressed concern that an exchange may decide not

to list an option class due to concerns that it will

not attract enough volume to get an adequate

capacity allocation.

48See Amex Letter; CBOE Letter; ISE Letter; Phlx

Letter; and Susquehanna Letter. 49See Amex Letter and ISE Letter. 50See Amex Letter; CBOE Letter; ISE Letter; PCX

Letter; Phlx Letter; and Susquehanna Letter. 51See Susquehanna Letter. 52See Amex Letter. 53See CBOE Letter. As an alternative to the

Commission’s proposal, the CBOE proposed that

capacity be allocated for Included Classes based on

the average number of quotes-to-cleared

transactions. Each exchange’s allocation would be

adjusted by an exchange’s efficiency, which would

be determined by measuring an exchange’s quoteto-trade ratio. The CBOE proposed to include a

temporary minimum guarantee to all exchanges of

8% of the total OPRA capacity.

54See ISE Letter and Phlx Letter.

55See ISE Letter.

56Alternatively, the ISE suggested that ‘‘Included

Classes’’ be defined as options classes with 15, or

with 50, average daily customer contracts. See ISE

Letter.

57Commission staff’s analysis relies on Options

Clearing Corporation data on average daily trading

volume for the period January 1, 2000 through

September 11, 2000 for options classes that traded,

on average, more than zero customer contracts per

day during this period.

58As an additional protection for new exchanges

that may not have had enough time to attract, on

average, 15 customer contracts each day in

multiply-traded options classes, the formula being

adopted today allows such exchanges to elect to

receive a slightly greater than equal portion of oneContinued

do this by giving credit to an exchange

based on the average quoting frequency

of all exchanges, not just its own.

Moreover, in response to commenters’

concerns regarding the Commission’s

proposal to calculate the average

quoting frequency based on activity

occurring during the first half-hour of

the trading day, the Commission has

modified the proposal to consider the

last full hour of the trading day, 3 p.m.

to 4 p.m. eastern time, when calculating

average quoting frequency. The

Commission believes that this

modification should address perceived

problems relating to the overlapping

opening rotations of the various

markets.

2. Comments on Capacity Allocation

Only for Classes in Which an Exchange

Has a Minimum Level of Trading

Volume

Under Proposed Alternative A, the

Commission proposed to allocate

capacity to an exchange, only for those

options classes that had a minimum

trading volume on that exchange, which

the Commission proposed to be 15

trades per day for multiply-listed

options classes and 30 trades per day for

exclusively-listed options classes.

Despite commenters’ concerns that

the proposed requirement that

exchanges receive capacity credit under

this scheme only for those classes for

which there was a minimum level of

trading may create disincentives to

adding new listings,47 the Commission

has retained this requirement in the

formula adopted today. The

Commission has chosen to retain this

requirement because of its concern that

the absence of such a requirement may

create incentives for exchanges to list

certain options products without a

sound business rationale and solely for

the purpose of increasing their capacity

allocation.

Commenters, however, generally

opposed using the number of trades as

the measure of activity in a particular

options class on an exchange.

Specifically, five commenters

recommended that contract volume,

rather than the number of trades, be

used to measure activity in an options

class to more accurately capture

customer interest in a particular options

class.48 Two of these commenters

believed that only customer contract

volume should be counted for purposes

of determining which options classes

were Included Classes.49

The Commission agrees with the

commenters’ suggestion that the number

of customer contracts, rather than the

total number of trades, be used to

determine which options classes are

Included Classes on an exchange. The

number of customer contracts traded is

a meaningful measure of the importance

of a particular exchange to investors. In

addition, to avoid encouraging market

makers to trade among themselves

solely for the purpose of achieving

sufficient volume in an options class,

the Commission is adopting

commenters’ recommendation that only

transactions involving customer

accounts be counted for purposes of

determining whether an options class is

an Included Class.

Several commenters addressed the

Commission’s proposed trading

thresholds for determining whether an

options class should be considered an

Included Class.50 One commenter stated

that multiply-listed and exclusivelylisted classes should be treated the same

because otherwise decisions to list new

classes could be inappropriately

influenced by capacity concerns.51 One

commenter recommended that an

options class be considered an Included

Class if the average daily contract

volume over three months is 50

contracts and the class is multiplylisted, and if the average daily contract

volume over three months is 100

contracts and the class is exclusivelylisted.52 This commenter believed that

these ‘‘more realistic thresholds’’ would

‘‘encourage all OPRA participants to

consider delisting inactively traded

products.’’ Another commenter

contended that an options class should

be considered an Included Class if the

exchange traded a minimum average of

40 contracts per day for both multiplylisted and exclusively-listed classes.53

Two commenters argued that

determining which options classes are

Included Classes should be based on

industry-wide volume, rather than the

volume on a particular exchange.54 One

of these commenters contended that

using exchange-specific volume criteria

to determine an Included Class would

inappropriately reward exchanges that

have an established market share in an

options class and would discourage

exchanges from listing new products to

compete in actively-traded issues.55 One

of these commenters recommended that

to eliminate this result an Included

Class be any class with an average daily

volume of greater than 25 customer

contracts on an industry-wide basis for

the last three months.56

With respect to the number of

customer contracts required to be traded

for an options class to be an Included

Class, the Commission is adopting a

requirement of 15 customer contracts for

multiply-listed, and 25 contracts for

exclusively-listed, options classes.

These numbers are supported by the

analysis conducted by Commission staff

that indicates that approximately 93%

of all multiply-listed options classes

trade, on average, more than 15

customer contracts per day. In addition,

approximately 60% of all exclusivelylisted options classes that traded at least

one contract over the period, on average,

trade more than 25 customer contracts

per day.57 The Commission continues to

believe that it is important to determine

whether an options class is an Included

Class on an exchange-by-exchange basis,

rather than on an industry-wide basis,

as suggested by commenters, to avoid

encouraging the listing of new products

solely to obtain additional capacity. The

Commission believes that the approach

it is adopting today ameliorates

concerns about discouraging exchanges

from listing new products by allocating

an equal portion of one-third of

available capacity to each options

exchange.58

75570 Federal Register / Vol. 65, No. 232 / Friday, December 1, 2000 / Notices

third available capacity. See OPRA Plan, Section

V(d)(i).

59See CBOE Letter.

60See Phlx Letter.

61This commenter proposed that the second onethird of capacity be allocated based on the number

of active options series in those Included Classes

traded at each exchange and that the remaining onethird of capacity be allocated based on an

exchange’s quoting efficiency. See Amex Letter.

62As discussed in Section V.B.6 below, an

exchange that has been operating for fewer than

nine months may elect, in lieu of an equal portion

of one-third of capacity and capacity based on the

number of Included Classes that it trades, to receive

40% of the available capacity divided by the

number of options exchanges.

63See ISE Letter; Phlx Letter; and Susquehanna

Letter.

64For this reason, the Commission did not adopt

the Phlx’s proposal that a portion of the total OPRA

capacity be divided equally among all the

exchanges, with the remaining portion allocated

based on the average daily trading volume across

all markets during a calendar quarter. Every quarter,

the portion of capacity to be divided equally would

increase by 10% until all OPRA capacity would be

divided equally. See Phlx Letter.

65See Susquehanna Letter.

66See ISE Letter; PCX Letter; and Phlx Letter.

67See Securities Exchange Act Release No. 41843

(September 8, 1999), 64 FR 50126 (September 15,

1999).

Finally, one commenter argued that

active trading in options classes

generates a larger number of quotes,

which must be reflected in an

exchange’s capacity allocation.59 In

response to the commenter’s assertion

that higher volume exchanges require

more capacity than lower volume

exchanges, Commission staff conducted

analysis that indicated that in a given

option, the exchange that executed the

most trades was no more likely to

generate the most quotes than any of the

other exchanges that traded the option.

Therefore, there is not necessarily a

direct relationship between the volume

of trading and the number of quotations

generated by a given market in a

particular options class. Instead, other

factors, such as the volatility of the price

of the underlying security, more directly

affect the number of quotations

generated for a particular options class.

Nonetheless, the Commission believes

that the approach adopted today

allocates greater capacity to the

exchanges that list more options classes

that exceed the minimum volume

threshold, which partly achieves the

commenter’s objectives.

3. Comments on Allocating Capacity

Equally Among the Options Exchanges

Proposed Alternative B was premised

on an equal allocation of capacity

among the options exchanges, with

adjustments based on a measure of

quoting efficiency. One commenter

stated its general support for equal

allocation of capacity among the

exchanges, but objected to the formulae

proposed by the Commission, arguing

that it would reward markets for

achieving trading volumes that were not

necessarily related to aggressive or

efficient quoting, but may be

attributable, instead, to factors such as

payment for order flow, internalization,

and other arrangements between market

participants and order flow providers.60

Another commenter suggested

allocating capacity based on three

different factors, each of which would

be used to allocate one-third of the total

OPRA system capacity. The first onethird of OPRA capacity would be

allocated equally among the exchanges

under the plan proposed by this

commenter.61

The amendment to the OPRA Plan

adopted by the Commission allocates to

each options exchange an equal portion

of one-third of OPRA capacity.62 The

Commission agrees that each exchange

that is operating an options market

requires a minimum amount of OPRA

capacity to launch new products,

regardless of the number of customer

contracts that it executes. Moreover, the

Commission recognizes that there is not

necessarily a direct correlation between

the competitiveness of a market’s quotes

and its trading volume.63 Nonetheless,

the Commission believes that to balance

several competing goals, it is

appropriate at this time to limit the

amount of capacity allocated based on

no other factor than the operation of an

options exchange. In particular, the

Commission must balance the interests

of fair competition with the need to

assure the availability to market

participants of timely and reliable

market data. Balancing these goals

requires the Commission to recognize

that the options exchanges have

decided, for competitive reasons, not to

trade exactly the same products, and

consequently, the capacity needs of the

various markets are not precisely the

same.64

4. Comments on Rewarding Quality of

Quotes

In the Proposing Release, the

Commission specifically sought

comment on whether there may be

another, more appropriate, performance

criteria on which to base capacity

allocation. One commenter argued that

neither allocation formula proposed by

the Commission created incentives to

market makers to disseminate quotes

that contribute value to the marketplace.

As an alternative, this commenter

recommended that the Commission

adopt an allocation formula that would

identify quotes that participate in the

national best bid and offer (‘‘NBBO’’)

and reward market makers that generate

those quotes.65

The Commission agrees that

allocating OPRA capacity to those

markets that disseminate quotes that

‘‘contribute value to the marketplace’’

would be the preferable way to allocate

OPRA capacity until a long-term

solution is available. In response to the

commenter’s recommendation,

Commission staff carefully considered

how this objective might be integrated

into a capacity allocation formula. The

Commission concluded, however, that

this objective could not be

accomplished at this time because of the

anticipated difficulty in implementing

an NBBO-based formula in the absence

of a consolidated NBBO in the options

market.

5. Comments on Anticompetitive

Aspects of Allocation Formula

As discussed above, several

commenters argued that the allocation

formulae proposed by the Commission

are anticompetitive because the options

exchanges would be discouraged from

listing new products and capacity

would be allocated to higher volume

exchanges to the detriment of newer and

smaller volume exchanges.66 The

Commission agrees with the

commenters that the existence of an

allocation formula may influence the

behavior of certain market participants.

Specifically, individual markets may

determine not to list certain new

products because of a concern that

insufficient order flow would be

attracted initially and would prevent the

exchange from earning capacity credit

for those products.

The Commission supports the efforts

of the options exchanges to actively

compete for order flow, and encourages

the markets to consider listing new

products to satisfy investor demand. In

response to the commenters’ concerns

that a capacity allocation formula is

antithetical to competition, however,

the Commission believes that it is not

the existence of an allocation formula,

per se, that limits the exchanges’ ability

to generate and disseminate quotation

message traffic at will. Instead, the

source of the restrictions on ‘‘free’’

competition is the anticipated

limitations on the availability of OPRA

systems capacity, in that the demand on

capacity is expected to exceed the

supply. The Commission has

encouraged the exchanges to develop

their own allocation methodology.67 An

allocation formula, such as the one

adopted by the Commission today, is

Federal Register / Vol. 65, No. 232 / Friday, December 1, 2000 / Notices 75571

68See CBOE Letter; ISE Letter; Phlx Letter; PCX

Letter; and Susquehanna Letter.

69See Phlx Letter.

70See Susquehanna Letter and PCX Letter.

71See CBOE Letter and ISE Letter.

72Under the CBOE proposal, a new exchange

would receive approximately 2% of total available

capacity during the first month, and 1% each

month. After four months, the new exchange would

be allocated 5% of total capacity. See CBOE Letter.

73The ISE states that the nine-month grace period

proposed by the Commission for new exchanges

would be insufficient to accommodate ISE’s

planned phase-in of 600 options classes during its

first year of operation. See ISE Letter. 74 If an options exchange begins to trade other

than on the first of February, May, August, or

November, each other options exchange’s capacity

will be recalculated pursuant to Section V (d)(ii)(B)

of the OPRA Plan, using data from the most recent

capacity allocation, except that any options

exchange that was qualified for, and election to

receive, the fixed new exchange allocation in the

most recent quarterly allocation, will receive a new

exchange allocation.

75Because a new exchange that has been

operating for fewer than 270 days on the fifth

business day following the end of a calendar quarter

will make its election for the next allocation period,

capacity will be allocated to new exchanges under

this scheme for their first year of operation. 76See SEC Order, supra note 4.

necessary because the exchanges have

not sufficiently planned for the amount

of capacity their business would need,

been able to agree on allocation of the

limited amount of capacity available, or

developed strategies to mitigate the

amount of market data generated. The

allocation methodology adopted today

is critical to ensure that the exchanges,

in the aggregate, transmit no more

market data to OPRA than the available

capacity allows OPRA to disseminate in

a timely manner to information vendors.

In the absence of such limits, fair and

orderly markets and the protection that

investors receive from timely and

accurate market data would be

jeopardized.

6. Comments About New Exchanges

Proposed Alternative A would have

treated all options classes listed on an

exchange that has been operating for

fewer than nine months as Included

Classes for purposes of determining

capacity allocation. Proposed

Alternative B would have provided all

exchanges, including new exchanges,

with a minimum level of OPRA

capacity, which the Commission

proposed to be 15%.

Commenters recommended

alternatives to the Commission’s

proposal to consider options classes

listed by new options exchanges to be

Included Classes for the first nine

months of operation.68 One commenter

argued that the proposed nine-month

period was both excessive and

arbitrary.69 Two commenters contended

that existing exchanges would be placed

at a competitive disadvantage if the

Commission were to allow new

exchanges a nine-month window to list

options classes.70

Several commenters offered

alternative accommodations for new

exchanges.71 Specifically, one

commenter proposed allocating new

exchanges a minimum amount of

capacity for the first four months of its

operation. After the first four months, a

new exchange would be allocated

capacity using the same formula as the

existing exchanges.72 Another

commenter proposed, as an alternative,

that new exchanges be allowed a oneyear phase-in period. Under this

approach, a new exchange, during its

first year of operation, would provide

the names of the options classes that it

intended to list for an upcoming quarter

and capacity would be allocated for

each class based on an industry-wide

volume threshold. Alternatively, this

commenter suggested that the

Commission extend its proposal to

permit a new exchange to count all the

option classes it lists from nine months

to a year and a quarter.73

The capacity allocation formula

adopted by the Commission provides

that, during a new exchange’s first

quarter of operation, or any portion

thereof, it will receive an allocation

equal to 40% of available capacity

divided by the total number of options

exchanges.74 For each quarter thereafter,

a new exchange may decide whether to

receive a capacity allocation (1) equal to

40% of available OPRA systems

capacity divided by the total number of

options exchanges; or (2) based on the

same formula used to determine the

capacity allocated to all other

exchanges. An exchange that has been

operating for fewer than 270 calendar

days will make an election five business

days following the end of a calendar

quarter regarding which method under

which it wishes to receive a capacity

allocation. New markets will be treated

the same as existing exchanges after the

end of their first year of operation.75

The Commission believes that this

approach, which provides an emerging

market one year to establish its business

and flexibility in determining its

capacity allocation, adequately balances

the Commission’s interest in providing

new markets with the capacity that they

need to compete with existing

exchanges, with its interest in not

unfairly disadvantaging existing

exchanges. In addition, the Commission

believes this approach is responsive to

concerns that by allowing new

exchanges to treat all options listed as

Included Classes, as proposed in

Alternative A, new exchanges might be

encouraged to list all or a substantial

number of options classes currently

traded.

VI. Costs and Benefits of the OPRA Plan

Amendment

The Commission is adopting

amendments to the OPRA Plan to

allocate, among the options exchanges,

OPRA’s peak period message handling

capacity. The Commission believes that

these amendments are necessary

because of the OPRA participants’

inability to agree on how to allocate

capacity among themselves and the

inability to increase OPRA systems

capacity within the short-term to a level

sufficient to permit the exchanges to

generate message traffic without

restraint.

Although the Commission’s adoption

of a capacity allocation formula inhibits

the exchanges’ ability to generate and

send to OPRA unlimited quotations, this

is a direct consequence not of the

formula, but of the fact that OPRA has

limited capacity. The Commission is

adopting these amendments as a shortterm solution and only after the OPRA

participants themselves have been

unable to reach agreement on an

objective capacity allocation formula.

As a more permanent solution, the

Amex, CBOE, PCX, and Phlx have

consented, as part of their settlement of

an enforcement action with the

Commission, to, among other things,

modify the organizational structure and

operation of OPRA so that each

exchange will independently determine

the amount of capacity that it will

obtain.76

The capacity allocation formula

adopted today, which will be calculated

quarterly and applied only when the

exchanges’ demand for OPRA capacity

exceeds its supply, combines a number

of elements found in the two alternative

formulae proposed by the Commission,

and incorporates several modifications

recommended by commenters.

The formula adopted by the

Commission allocates to each options

exchange an equal portion of one-third

of available OPRA systems capacity.

This means that each exchange would

have available at least 533 messages per

second with the current 8,000 message

per second capacity of OPRA. When

OPRA capacity is expanded to 12,000

messages per second, as it is expected

to be by year-end, each exchange would

have available at least 800 messages per

second.

The capacity remaining after the

allocation described above and any

allocation to new exchanges as

75572 Federal Register / Vol. 65, No. 232 / Friday, December 1, 2000 / Notices

77See, infra Section II.

78For purposes of the formula, the term

‘‘customer contract’’ is defined as an options

contract executed on an options exchange and

cleared in a customer account at a registered

clearing agency. See OPRA Plan, Section III (m).

79The term ‘‘options class’’ is defined in OPRA

Plan, Section III (n), and includes options on groups

or indexes of securities.

80See Proposing Release, Supra note 18.

81See CBOE Letter; Phlx Letter; Susquehanna

Letter; SIAC Letter; PCX Letter; ISE Letter; and

Amex Letter.

82On August 1, 2000, OPRA reported a oneminute peak of 3,581 messages per second. While

this peak does not exceed OPRA’s current capacity,

in the recent past, the options exchanges have come

dangerously close to exceeding OPRA’s capacity.

See Proposing Release, supra note.

83On August 28, 2000, decimal pricing on 13

exchange-listed stocks, three of which were

optionable, began trading in decimals. See letter

from Joe Corrigan, Executive Director, OPRA, to

OPRA Market Data Recipients, dated August 17,

2000. On September 25, 2000, however, 106

additional exchange-listed stocks, 33 of which are

optionable, began decimal pricing. On November 1,

2000, all of the exchanges and the Commission will

determine whether to convert all listed stocks and

all options to decimal pricing on December 4, 2000.

In addition, as of October 5, 2000, ISE had begun

trading options on 141 of its planned 600 classes.

84See Susquehanna Letter.

85See Phlx Letter.

86See Phlx Letter.

87See ISE Letter.

88See ISE Letter; PCX Letter; and Phlx Letter.

89See Amex Letter; CBOE Letter; ISE Letter;

Susquehanna Letter; PCX Letter; and Phlx Letter.

90As noted above, this year the options markets

have had to agree, on six separate occasions, to

allocate OPRA systems capacity. See Section II,

Background, supra.

described below, will be allocated

among the exchanges based upon a

variation of Proposed Alternative A, as

set forth in the Proposing Release.77

Specifically, this remaining OPRA

systems capacity will be allocated to the

exchanges based on the average

quotation message traffic generated

during the last full hour of the trading

day, 3 p.m. to 4 p.m. eastern time. An

exchange will receive an allocation only

for those options classes for which at

least a minimum number of customer

contracts 78 are traded on that exchange.

The formula does not allocate capacity

to an exchange for a particular options

class in which the exchange’s average

daily contract volume over a calendar

quarter does not exceed 15 customer

contracts for multiply-listed options

classes and 25 customer contracts for

exclusively-listed options classes.79

Exchanges will not be given additional

capacity for new listings that do not

trade the minimum number of customer

contracts set forth above.

Because new exchanges may not have

had time to develop their business to

attract a sufficient number of customer

contracts to meet the minimums set

forth above, such exchanges may

instead elect to receive an allocation of

OPRA systems capacity slightly greater

than an equal portion of one-third of

available capacity. Specifically, during

its first nine months of operation, a new

exchange will be permitted to elect

whether to accept a capacity allocation

equal to 40% of available capacity

divided by the total number of options

exchanges, or to be treated the same as

all other exchanges under the formula.

New markets will be treated the same as

existing exchanges after the end of their

first nine months of operation.

A. Response to Comments

In the Proposing Release, the

Commission requested comment on the

anticipated costs and benefits associated

with the proposed allocation

alternatives to the OPRA Plan, as well

as any possible anticompetitive impact

of the Proposed Alternatives.80

Specifically, the Commission requested

commenters to address whether either

of the Proposed Alternatives would

generate anticipated benefits or impose

any costs on U.S. investors or others.

Several commenters shared the

Commission’s concern about OPRA

capacity.81 Currently, OPRA has the

capacity to handle 8,000 messages per

second. While the options exchanges

currently have a slight capacity

cushion,82 the Commission continues to

be concerned that the full

implementation of decimal pricing,

ISE’s complete roll-out of new listings,

and OPRA’s planned dissemination of

quotes with size may cause peak

quoting rates to soon exceed OPRA

systems capacity.83 The Commission,

therefore, believes that the allocation

formula that it is adopting today is

necessary to avoid delayed quotes that

may result if the full implementation of

decimal pricing, complete roll-out of

ISE, and the dissemination of quotes

with size causes the demand for OPRA

systems capacity to exceed the supply.

Commenters also raised concerns

regarding the Proposed Alternatives,

which are addressed in detail above,

that implicitly raise issues as to the

costs associated with allocating

capacity. Generally, commenters

believed, in part, that the proposed

alternatives could impact an exchange’s

decision to list certain types of

products,84 create disincentives to list

new options,85 fail to provide an

incentive to quote economically,86 lockin market share,87 or lead to

anticompetitive results because the

options exchanges would be

discouraged from listing new products

and capacity would be allocated to

higher volume exchanges to the

detriment of newer and smaller volume

exchanges.88 In addition, six

commenters opposed determining the

average quoting frequency of multiplytraded and exclusively-traded options

classes based on the quoting activity

occurring during the first half-hour after

the opening rotation citing the difficulty

in obtaining such information for the

proposed time period.89 Specifically,

commenters complained that it would

be difficult to process the required raw

data due to the lack of clarity as to when

a particular market has completed its

opening rotation.

B. Benefits

Absent a mechanism to fairly allocate

OPRA systems capacity among the

markets, investors may be forced to rely

on stale or delayed quote and trade

information in making their investment

decisions. Thus, the principal benefit of

the amendments being adopted is to

avoid the potential harm to market

participants and investors associated

with delayed quotes and trade

information, while contributing to

efficient price discovery and the best

execution of customers’ orders by their

brokers. If peak quoting rates exceed

OPRA systems capacity, queuing may

occur and stale or incomplete market

data may be transmitted to market

participants and investors, thereby

reducing market transparency and

hampering efficient price discovery.

Specifically, if the options market data

sent by the exchanges to OPRA exceeds

OPRA system capacity to publicly

disseminate it on a real-time basis, only

those market participants located on the

floor of an exchange receive real-time

market information. Therefore, the

Commission believes that the allocation

formula should help ensure that timely

and reliable real time market

information is available to investors to

rely on in making trading and

investment decisions.

In addition, the Commission notes

that the adoption of an allocation

formula will eliminate the need for the

options exchanges to continuously

negotiate the allocation of OPRA system

capacity as any allocation that is needed

can be accomplished in an objective and

transparent manner. The allocation

formula adopted today will allow the

options exchanges to focus their

resources on other things, such as

developing an amendment to the OPRA

Plan that will allow each exchange to

independently determine the amount of

capacity that it will obtain.90 Therefore,

the Commission believes that the

Federal Register / Vol. 65, No. 232 / Friday, December 1, 2000 / Notices 75573

91See SEC Order, supra note 4.

92The Commission notes, however, that the

options exchanges are already allocating existing

OPRA capacity during peak periods on six

occasions, while continuing to work on other shortterm mitigation strategies. See supra note 4.

93As discussed above, the options markets have

reluctantly agreed on separate occasions to allocate

existing OPRA capacity among themselves during

peak periods through temporary amendments to the

OPRA Plan. The capacity allocation used by the

exchanges has been based loosely on the historical

peaks experienced by each options market, and

determined through negotiations among the

markets.

adoption of the allocation formula will

reduce the work of the exchanges and

thereby, allow the exchanges to allocate

their resources to other priorities.

The Commission also believes that,

until sufficient capacity is available to

the options markets to handle projected

message traffic growth, the capacity

allocation formula adopted by the

Commission today should help to

ensure that scarce OPRA systems

capacity is allocated in an objective and

transparent manner. The Commission

continues to believe that the adoption of

objective criteria should bring

additional transparency and consistency

to the allocation process. By using an

objective capacity allocation formula to

determine each exchange’s message

traffic limitations during peak usage

periods, the options markets should be

able to disseminate options market data

on a real-time basis, which should foster

competition. Further, allocating

capacity should help maintain efficient

and orderly markets for options by

ensuring that current market data is

continuously available and reliable.

Finally, allocating capacity in an

objective and transparent manner will

enable the exchanges to better manage

their demand for OPRA system capacity

and should encourage each exchange to

establish and utilize efficient quote

reduction methods based on the amount

of message capacity it has been

allocated, thereby promoting efficiency.

C. Costs

The Commission has carefully

considered the concerns raised by the

commenters. First, the Commission

recognizes that the options exchanges

will incur certain costs in determining

their average quotation message traffic

for purposes of the calculation of

Included Classes. These costs may

include a one-time systems cost to

establish a program to calculate which

options classes traded by each exchange

satisfy the definition of Included

Classes. In addition, there may be

ongoing costs associated with assigning

staff to perform the calculation on a

quarterly basis. Nonetheless, the

Commission notes that the options

exchanges routinely compile much of

this information, although the data may

have to be slightly reconfigured for the

calculation of Included Classes.

Second, the Commission recognizes

the validity of commenters’ concerns

that the existence of an allocation

formula may discourage options

exchanges from listing new products

and capacity may be allocated to higher

volume exchanges to the possible

detriment of new and smaller volume

exchanges. To address these concerns,

the allocation formula adopted by the

Commission provides each exchange

with a minimum capacity allocation,

regardless of the volume or activity on

other exchanges. This certain allocation

should allow exchanges to launch new

products in order to compete with

larger, more established exchanges. In

addition, the Commission, by adopting

the allocation formula, is not dictating

how each exchange allocates its

capacity within its own market. Instead,

each options exchange will be able to

determine whether to use its capacity

for new or existing products.

Finally, in response to commenters’

concerns about the costs associated with

the perceived anticompetitive impact of

an allocation formula, the Commission

notes that it is not the existence of an

allocation formula, per se, that limits

the exchanges’ ability to generate and

disseminate quotation message traffic at

will. Instead, the source of the

restriction on ‘‘free’’ competition is the

anticipated limitation on the availability

of OPRA systems capacity, in that the

demands on capacity are expected to

exceed supply. An allocation formula,

such as the one adopted by the

Commission today, is necessary because

the exchanges have not sufficiently

planned for the amount of capacity their

business would need, been able to agree

on allocation of the limited amount of

capacity available, or developed

strategies to mitigate the amount of

market data generated. The allocation

methodology adopted today is critical to

ensure that the exchanges, in the

aggregate, transmit no more market data

to OPRA than the available capacity

allows OPRA to disseminate in a timely

manner to information vendors. In the

absence of such limits, fair and orderly

markets and the protection that

investors receive from timely and

accurate market data would be

jeopardized.

D. Conclusion

It is important to emphasize that the

allocation formula adopted by the

Commission today is merely a shortterm solution while the options

exchanges look for a more permanent

solution to the capacity issue pursuant

to their settlement agreement with the

Commission.91 Based on the comments

and its own analysis, the Commission

believes that the OPRA plan

amendments adopted today provide a

reasonable allocation of capacity among

the options exchanges. First, by

ensuring that each options exchange

receives a minimum capacity allocation,

the formula ensures that each exchange

retains a basic amount of capacity at all

times, regardless of the activity or

actions of the other exchanges. Second,

by measuring average quotation message

traffic, the formula takes into account

the individual needs of each exchange,

while relying on a minimum volume

threshold to avoid creating incentives

for markets to list products solely for the

purpose of increasing their capacity

allocation. Third, the formula provides

a new exchange with capacity to operate

without encouraging it to irresponsibly

list options classes solely to obtain

capacity. Finally, each exchange will

retain the flexibility to determine how

best to allocate its capacity allocation

within its own market.

In addition, the Commission

recognizes that there are always costs

associated with allocating a finite

resource among users.92 In fact, there

are costs associated with the way the

markets have been allocating capacity

among themselves; 93 namely, the

failure to provide incentives for the

exchanges to reduce excessive quoting

of existing listings and to add new

listings only with a sound business

rationale. The allocation formula

adopted by the Commission today,

which combines several elements of the

alternative formulae proposed by the

Commission in its Proposing Release

and incorporates specific

recommendations of commenters, is

intended to minimize the impact on any

one options exchange and to take into

account the differences between the

options exchanges. Therefore, while the

Commission recognizes that the

capacity allocation formula being

adopted today may, on a short-term

basis, limit the ability of the exchanges’

to generate and send to OPRA unlimited

quotations during peak quotation

periods, the Commission believes that

the allocation formula balances this

concern with the needs of investors and

other market participants in having

timely and reliable market information

to use to make informed investment and

trading decisions.

75574 Federal Register / Vol. 65, No. 232 / Friday, December 1, 2000 / Notices

94 15 U.S.C. 78w(a)(2).

95See CBOE Letter; ISE Letter; Phlx Letter; and

PCX Letter, supra note 66.

96The commenters generally directed their

specific concerns to the two alternative formulae

proposed by the Commission in the Proposing

Release. As discussed above, the Commission has

determined to adopt a modification of the two

alternative proposals. Therefore, this discussion is

limited to the general comments raised concerning

the competitive aspects of allocating OPRA

capacity.

97See Phlx Letter.

98See CBOE Letter.

99See ISE Letter and Phlx Letter.

100See PCX Letter. 101 15 U.S.C. 78w(a)(2). 102 15 U.S.C. 78c(f).

VII. Effects on Competition, Efficiency,

and Capital Formation

Section 23(a)(2) of the Act 94 requires

that the Commission, when

promulgating rules under the Act, to

consider the impact any rule would

have on competition and to not adopt

any rule that would impose a burden on

competition that is not necessary or

appropriate in the public interest. In the

Proposing Release, the Commission

solicited comment on the effects on

competition, efficiency, and capital

formation of the proposed amendments.

Specifically, the Commission requested

commenters to address how the

proposed amendments would affect

competition between and among the

options exchanges, market participants,

and investors and how the proposed

amendments would affect efficiency and

capital formation. The Commission

received four comment letters that

specifically addressed these issues.95

The commenters expressed general

concerns about the competitive

implications of the proposed rules.96

For example, one commenter stressed

that allocating OPRA systems capacity

should not come at the expense of

competition among the exchanges.97

Another commenter argued that any

objective allocation formula proposed

by the Commission should account for

each exchange’s individual performance

to encourage competition and provide

incentives for each exchange to improve

its efficiency and increase its volume

and order flow.98 Two commenters

emphasized that fundamental to any

allocation formula should be that it

promote competition and not preserve

the market share of any options

exchange.99 Finally, one commenter

supported the Commission’s efforts to

create an equitable methodology to

allocate OPRA systems capacity, but

cautioned that competition between the

options markets should not be

artificially restricted.100

The Commission has considered the

comments and the amendments in light

of the standards cited in Section 23(a)(2)

of the Act 101 and believes that the

amendments to the OPRA Plan adopted

today likely would not impose any

significant burden on competition that

is not necessary or appropriate in

furtherance of the Act. The Commission

recognizes that allocating OPRA systems

capacity among the OPRA participants

does raise competitive concerns because

capacity allocation inherently limits an

exchange’s ability to freely generate an

unlimited number of quotes, which may

restrict an exchange’s ability to compete

with other markets on the basis of price.

However, the Commission believes that

it is not the existence of an allocation

formula that could limit competition

between the options exchanges. Instead,

any restriction on competition is caused

by the limitations, both previously

experienced and further anticipated, on

the availability of OPRA systems

capacity, in that the demands on

capacity are expected to exceed the

supply.

As described above, OPRA systems

capacity is limited. Thus, in times of

high market volume or market volatility,

there may not be sufficient systems

capacity to accommodate the message

traffic generated by the options

exchanges, which could lead to queuing

of all or a substantial portion of options

market data that is sent by each options

exchange to OPRA for dissemination to

the public. Further, the demand for

OPRA systems capacity is expected to

increase upon the full implementation

of decimal pricing. Therefore, the

Commission has determined that a fair

and objective formula to allocate the

limited systems capacity during times

when the systems capacity is not

sufficient to handle excess message

traffic is necessary to help ensure that

allocation is completed in an objective

and transparent manner. The

amendments to the OPRA Plan,

therefore, provide a means to distribute

capacity equitably among the exchanges

during those times when OPRA systems

capacity is insufficient.

By using an objective allocation

formula to determine each exchange’s

message traffic limits during peak usage

periods, the Commission believes that

each options exchange will be able to

continue to disseminate on a real-time

basis its options market data, which

should maintain price competition, and

preserve liquidity and transparency for

all market participants, including retail

investors. If capacity constraints are not

addressed and capacity is not

objectively allocated, the dissemination

of all options market data could be

compromised, which could halt all

price competition among the exchanges

and result in investors receiving

executions at prices that do not reflect

the current market. Further, investors

would be unable to make informed

order-routing decisions because, if the

system is overloaded by excessive

message traffic, the systems could

queue, leading to the dissemination of

stale or incomplete market data. The

allocation of capacity in an objective

and transparent manner will enable

each exchange to continue to

disseminate its options market data on

a real-time basis, thus enabling

competition, albeit limited, to continue

during high volume or high volatility

times and enabling investors to make

informed market decisions.

In adopting these amendments, the

Commission has determined that the

action is necessary and appropriate in

the public interest for the protection of

investors, and has considered the

amendments’ impact on efficiency,

competition, and capital formation.102

The Commission believes that the

allocation formula should enhance the

ability of the options exchanges to

operate in an efficient and orderly

manner by ensuring that current market

data is constantly available. By having

an objective allocation formula, each

market will be able to determine and

plan how to best operate during times

when allocation of OPRA systems

capacity is necessary. Further, the

allocation formula should encourage

each individual exchange to establish

and utilize quote reduction methods

based on the amount of message

capacity it has been allocated, thereby

promoting efficiency of the market data

dissemination process. As discussed in

greater detail above, the Commission

has considered the amendments’ impact

on competition and believes that any

restriction on competition is caused not

by the Commission’s adoption of an

allocation formula, but by the limited

supply of OPRA systems capacity.

Finally, the Commission believes that

the proposed amendments to the OPRA

Plan, which should help to ensure the

availability of timely and reliable realtime market data should enhance public

confidence in the integrity of the

options markets and consequently,

facilitate capital formation.

VIII. Summary of Final Regulatory

Flexibility Analysis

A Final Regulatory Flexibility

Analysis (‘‘FRFA’’) has been prepared in

accordance with the provisions of the

Regulatory Flexibility Act (‘‘Reg. Flex.

Federal Register / Vol. 65, No. 232 / Friday, December 1, 2000 / Notices 75575

103 5 U.S.C. 603(a).

104Securities Exchange Act 11Aa3–2, 17 CFR

240.11Aa3–2.

105See Proposing Release, supra note 18.

106See PCX Letter.

107 17 CFR 240.0–10.

108See PCX letter.

109The amendments to the OPRA Plan would

directly affect only the OPRA participants that

operate options markets; namely, Amex, CBOE, ISE,

PCX, and Phlx, none of which are small entities.

See 17 CFR 240.0–10.

110 17 CFR 240.11Aa3–2(b)(2) and (c)(1).

111 15 U.S.C. 78k–1(a)(3)(B).

Act’’),103 regarding the Commission’s

adoption of amendments to the OPRA

Plan establishing a formula to allocate

the message capacity of the OPRA

system among the participant

exchanges.104 An Initial Regulatory

Flexibility Analysis (‘‘IRFA’’) was

prepared in accordance with 5 U.S.C.

603 and was made available to the

public.105 The Commission received one

comment directly relating to the IRFA

prepared in connection with the

Proposing Release.106 In addition, the

Commission notes that amendments to

the OPRA Plan are being adopted in

substantially the same format as

proposed, incorporating certain

recommendations from commenters. As

a result, the FRFA is in substantially the

same format as the IRFA.

As discussed more fully in the FRFA,

the amendments to the OPRA Plan

would directly affect the five OPRA

participant exchanges, none of which is

a small entity as defined in Rule 0–10

under the Act.107 One commenter, an

OPRA participant exchange, stated that

all its members would be affected if

quotation capabilities were reduced

and, as a result, small businesses would

be impacted by the amendments

because many of this commenter’s

members are small entities.108 The

Commission, however, does not believe

entities other than the OPRA participant

exchanges will be directly affected by

the amendments.109

The amendments to the OPRA Plan

adopted by the Commission provide an

equitable method of allocating OPRA

capacity among the participant

exchanges during peak usage periods

based on objective criteria. Further, the

amendments are intended to implement

an equitable allocation of capacity,

which should ensure that all brokerdealers and investors have available to

them accurate and timely information

with respect to quotations for and

transactions in options and should help

to avoid delays and queues in the

dissemination of options market

information. The Commission believes

that the amendments only apply

directly to the participant exchanges.

Thus, there would be no direct impact

on small businesses for the purposes of

the Reg. Flex. Act. In addition, the

Commission believes that the OPRA

Plan amendments being adopted do not

establish any new reporting,

recordkeeping, or compliance

requirements for small entities. A copy

of the FRFA may be obtained by

contacting John Roeser, Attorney,

Division of Market Regulation,

Securities and Exchange Commission,

450 Fifth Street, N.W., Washington, D.C.

20549–1001.

IX. Conclusion

The Commission finds that the

amendments to the OPRA Plan are

consistent with the Act, particularly

Section 11A. Therefore, the Commission

hereby amends the OPRA Plan to

provide for a specific formula to allocate

capacity among the options exchanges

during peak usage periods pursuant to

Rule 11Aa3–2(b)(2) and (c)(1) 110 and

the Commission’s authority under

Section 11A(a)(3)(B) of the Act.111

X. Description of Amendments to the

OPRA Plan

Additions are italicized; deletions are

[bracketed].

* * * * *

III. Definitions

(a)–(k) No change.

(l) Relevant Calendar Quarter.

(i) For the capacity allocation

commencing on May 1 of each year, the

Relevant Calendar Quarter shall mean

the months of January, February, and

March.

(ii) For the capacity allocation

commencing on August 1 of each year,

the Relevant Calendar Quarter shall

mean the months of April, May, and

June.

(iii) For the capacity allocation

commencing on November 1 of each

year, the Relevant Calendar Quarter

shall mean the months of July, August,

and September.

(iv) For the capacity allocation

commencing on February 1 of each year,

the Relevant Calendar Quarter shall

mean the months of October, November,

and December.

(m) ‘‘Customer Contracts’’ means

options contracts executed on an

options exchange and cleared in a

customer account at a registered

clearing agency.

(n) ‘‘Options Class’’ means all of the

put option or call option series overlying

a security, as defined in Section 3(a)(10)

of the Act, including a group or index

of securities.

(o) ‘‘Included Class’’ means any

options class listed by an OPRA

participant:

(i) For which such participant

executes during the Relevant Calendar

Quarter an average of at least 15

customer contracts per day if the

options class is multiply-listed; or

(ii) For which such participant

executes during the Relevant Calendar

Quarter an average of at least 25

customer contracts per day if the

options class is exclusively-listed.

(p) Unless qualified for, and electing

to receive a New Exchange Share,

pursuant to paragraph (d)(i) of Section

V, an OPRA participant that is

operating an options market receives a

‘‘Capacity Credit’’ for each options class

that is an Included Class for that

participant equal to:

(i) For a multiply-traded options class,

the average quote messages received by

OPRA between 3:00 p.m. and 4:00 p.m.

eastern time during the Relevant

Calendar Quarter by all OPRA

participants for which such class is an

Included Class, divided by the number

of such OPRA participants; or

(ii) For an exclusively-listed options

class, the average quote messages

received by OPRA during the Relevant

Calendar Quarter by the OPRA

participant between 3:00 p.m. and 4:00

p.m. eastern time.

(q) ‘‘Allocation Percentage’’ for an

OPRA participant means the total of all

such participant’s Capacity Credits

divided by the total of all Capacity

Credits for all OPRA participants.

(r) ‘‘New Exchange Share’’ means 40

percent of OPRA systems capacity

divided by the number of OPRA

participants that are operating an

options market.

IV. No Change

V. (a)–(c) No change.

(d) Quarterly Calculation of Capacity

Allocation

(i) On the fifth business day following

the end of the Relevant Calendar

Quarter, each options exchange that has

been operating for fewer than 270

calendar days will elect whether to

accept a capacity allocation equal to:

(A) the New Exchange Share; or (B) the

capacity allocation that it would receive

under paragraph (d)(ii)(B).

(ii) On the first of February, May,

August, and November of each year,

each OPRA participant that operates an

options exchange will receive an

allocation of OPRA systems capacity in

an amount equal to:

(A) Its New Exchange Share, if so

elected pursuant to paragraph (d)(i) of

this Section; or

(B) The aggregate of:

75576 Federal Register / Vol. 65, No. 232 / Friday, December 1, 2000 / Notices

(1) One-third of OPRA systems

capacity divided by the number of

OPRA participants that are operating an

options market; and

(2) The total OPRA systems capacity,

less the allocation of any New Exchange

Share and the total allocation of

capacity pursuant to paragraph

(d)(ii)(B)(1), multiplied by its Allocation

Percentage. 

(iii) OPRA will calculate the capacity

allocation specified in paragraph (d)(ii)

as soon as possible after the end of the

Relevant Calendar Quarter. OPRA will

use data to make this calculation that is

provided to it by the OPRA participants.

Alternatively, OPRA can contract with

its processor or with another third party

to perform this calculation. OPRA will

notify the OPRA participants and the

Commission of the capacity allocation

promptly after such calculation is made.

(e) Notwithstanding paragraph (d) of

this Section, for the first quarter, or any

portion thereof, that an exchange

commences trading of options, it will be

allocated capacity equal to the New

Exchange Share. If an exchange

commences trading of options other

than on the first of February, May,

August, or November, each other

options exchange’s capacity shall be

recalculated pursuant to paragraph

(d)(ii)(B) of this Section, using the

Allocation Percentage figures from the

most recent Relevant Calendar Quarter,

except that any options exchange that

was qualified for, and elected to receive,

the New Exchange Share in the most

recent quarterly allocation, will receive

a New Exchange Share.

(f) [d] Indemnification

(i)–(ii) No change.

* * * * *

Dated: November 27, 2000.

By the Commission.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 00–30661 Filed 11–30–00; 8:45 am]

BILLING CODE 8010–01–U