Case Name: BOARD OF TRADE OF THE CITY OF CHICAGO and Chicago Mercantile Exchange, Petitioners, v. SECURITIES AND EXCHANGE COMMISSION, Respondent, and Delta Government Options Corporation, Intervening Respondent
Court: United States Court of Appeals for the Seventh Circuit
Jurisdiction: United States
Decision Date: 1991-02-04
Citations: 923 F.2d 1270
Docket Number: No. 90-1246
Parties: BOARD OF TRADE OF THE CITY OF CHICAGO and Chicago Mercantile Exchange, Petitioners, v. SECURITIES AND EXCHANGE COMMISSION, Respondent, and Delta Government Options Corporation, Intervening Respondent.
Judges: Before POSNER and FLAUM, Circuit Judges, and FAIRCHILD, Senior Circuit Judge.
Reporter: Federal Reporter 2d Series
Volume: 923
Pages: 1270–1277

Head Matter:
BOARD OF TRADE OF THE CITY OF CHICAGO and Chicago Mercantile Exchange, Petitioners, v. SECURITIES AND EXCHANGE COMMISSION, Respondent, and Delta Government Options Corporation, Intervening Respondent.
No. 90-1246.
United States Court of Appeals, Seventh Circuit.
Argued Dec. 4, 1990.
Decided Feb. 4, 1991.
Rehearing and Rehearing En Banc Denied April 2, 1991.
Mark D. Young, Mitchell F. Hertz, Kirkland & Ellis, Washington, D.C., Garrett B. Johnson, Robert Steigerwald, John H. Stas-sen, Kirkland & Ellis, Chicago, Ill., for Bd. of Trade of the City of Chicago.
Jerrold E. Salzman, Freeman, Freeman & Salzman, Chicago, Ill., for Chicago Mercantile Exchange.
Daniel L. Goelzer, Anne Chafer, Douglas E. Crow, Joan A. McCarthy, Paul Gonson, S.E.C., Washington, D.C, for S.E.C.
Harold C. Hirshman, Stuart Altschuler, Sonnenschein, Nath & Rosenthal, Chicago, Ill., Catherine A. Ludden, Morgan, Lewis & Bockius, New York City, for Delta Government Options Corp.
Before POSNER and FLAUM, Circuit Judges, and FAIRCHILD, Senior Circuit Judge.

Opinion:
POSNER, Circuit Judge.
This case is before us for the second time; familiarity with our first opinion, 883 F.2d 525 (7th Cir.1989), is presumed. The question we must answer this time is whether a system for trading options on federal government securities that has been put together by RMJ, a broker; Delta, a clearing agency; and SPNTCO, a bank (the last playing an essentially custodial role unnecessary to discuss further) is an "exchange" within the meaning of section 3(a)(1) of the Securities Exchange Act of 1934, 15 U.S.C. § 78c(a)(l), in which event it must register with the Securities Exchange Commission. The Commission, faced as it was merely with an application by Delta to register as a clearing agency under section 17A(b) of the Act, 15 U.S.C. § 78q-l(b), thought it unnecessary to decide whether the Delta system — as we shall call the trading system put together by the three firms — is an exchange. We disagreed in our first opinion. We held that the Commission could not, as it had done, approve Delta's application without deciding whether the system whose trades it intended to clear could lawfully operate without registering as an exchange. We therefore remanded the ease to the Commission for a determination of the system's status. The Commission held that it was not an exchange, and therefore adhered to its decision to register Delta as a clearing house. The Board of Trade and the Chicago Mercantile Exchange again petition for review. They are concerned about competition from the Delta system. We held in our first opinion that this concern gives them standing to challenge the Commission's decision to allow Delta to become a registered clearing house.
An ingenious device for facilitating the purchase and sale of securities, the Delta system works roughly as follows. (We refer the reader to our previous opinion for a more complete and more precise description.) The system specifies the form of option contract that shall be the security traded. Some of the terms of the contract are fixed, such as the maximum term of the option and the day of the month on which it expires. Others are left open to be negotiated by the parties, such as the premium, the exercise price, and the month of expiration. The traders, who consist not only of securities dealers but also of banks, pension funds, and other institutional investors, communicate their buy or sell offers to RMJ, which enters the offers in the system's computer. Delta, the clearing agency, monitors the computer and when it sees a matching buy and sell offer it notifies the traders that they have a deal (but doesn't tell them with whom) and it takes the necessary steps to effectuate the completed transaction. The interposition of Delta between the traders protects the anonymity of each from the other as well as guaranteeing to each that the other will honor the terms of the option traded.
The fixing of some standardized terms so that one trader is not offering to buy apples and the other offering to sell oranges; the guarantees of anonymity and performance; the pooling of buy and sell offers in a single (electronic) place — these essential features of the Delta system are methods for creating a market that will bring together enough buy and sell offers to enable transacting at prices that will approximate the true market values of the things traded. Does this make the Delta system an exchange, that is, "any organization, association, or group of persons . which constitutes, maintains, or provides a market place or facilities for bringing together purchasers and sellers of securities or for otherwise performing with respect to securities the functions commonly performed by a stock exchange as that term is generally understood"? There is no doubt that the Delta system creates an electronic marketplace for securities traders, and the petitioners say that no more is required to establish that the system must register as an exchange. The Commission's reply emphasizes the words "generally understood." The Delta system is not — not quite, anyway — what is generally understood by the term "stock exchange." It lacks a trading floor. It lacks specialists, who enhance the liquidity of an exchange by using their own capital to trade against the market when the trading is light, in order to buffer price swings due to the fewness of offers rather than to changes in underlying market values. Not all conventional exchanges have specialists, but those that do not have brokers who trade for their own account as well as for their customers' accounts, and the additional trading enhances the market's liquidity. It is fitting that such brokers are called "market makers." Securities Exchange Act of 1934, § 3(a)(38), 15 U.S.C. § 78c(a)(38). RMJ does not trade for its own account in the Delta system.
The petitioners reply that the words "generally understood" apply only to functions other than the central one of "pro-vid[ing] a market place or facilities for bringing together purchasers and sellers of securities." In other words they want us to put a comma after "sellers of securities." This done, they argue as follows: the statute defines exchange as any entity that provides a facility for bringing together purchasers and sellers of securities, whether or not in providing that facility it is performing an exchange function as the term exchange is generally understood; the Delta system provides a facility for bringing together purchasers and sellers of securities; therefore Delta is an exchange.
Unless the petitioners can be permitted to add their own punctuation to the statute, we do not think that their reading is any more persuasive, even at the literal level, than the Commission's reading, which places the provision of a market place or of other facilities for bringing securities traders together among those functions performed by a stock exchange as the term is generally understood, and thus subjects "providpng] a market place or facilities" to the qualifying force of "generally understood." Moreover, if the petitioners are to be consistent in advancing a "literal" reading of the statute, they should read "bring together" literally too. But even an admitted exchange does not literally "bring together" purchasers and sellers of securities, except when the floor brokers are trading for their own account. It does not bring them into physical propinquity. And a broker's waiting room, which does bring purchasers and sellers of securities into physical propinquity, is not an exchange. We therefore question whether the petitioners have a coherent approach to the interpretation of the statute.
The consequence of their interpretation must also give us pause. The Delta system cannot register as an exchange, because the statute requires that an exchange be controlled by its participants, who must in turn be registered brokers or individuals associated with such brokers. Securities and Exchange Act of 1934, § 6(b)(3), (c)(1), 15 U.S.C. § 78f(b)(3), (c)(1); Securities Exchange Act Release No. 21439, 49 Fed.Reg. 44577, 44578 (Oct. 31, 1984). So all the financial institutions that trade through the Delta system would have to register as brokers, and RMJ, Delta, and the bank would have to turn over the own ership and control of the system to the institutions. The system would be kaput. One must question an interpretation of the definitional provision that would automatically prevent competition for-the exchanges from an entity that the exchanges are unable to show poses a threat to the safety of investors by virtue of not being forced to register and assume the prescribed exchange format. As the Commission stresses, each of the three firms that constitute the Delta system is comprehensively regulated; no regulatory gaps are created by declining to place the system itself in the exchange pigeonhole; the only thing that such classification would do would be to destroy the system.
What is true is that the Delta system differs only in degree and detail from an exchange. Its trading floor is a computer's memory. Its structure is designed to encourage liquidity, though not to the same extent as the structure of an exchange is. Section 3(a)(1) is broadly worded. No doubt (considering the time when and-circumstances in which it was enacted) this was to give the Securities and Exchange Commission maximum control over the securities industry. So the Commission could have interpreted the section to embrace the Delta system. But we do not think it was compelled to do so. The statute is not crystal clear; on the contrary, even when read literally, which is to say without regard to context and consequence, it does not support the petitioners' argument without repunctuation of the statute and without overlooking the impossibility of a consistently literal reading. An administrative agency has discretion to interpret a statute that is not crystal clear; Chevron v. Natural Resources Defense Council, 467 U.S. 837, 844-45, 104 S.Ct. 2778, 2782-83, 81 L.Ed.2d 694 (1984). The Securities and Exchange Commission can determine better than we generalist judges whether the protection of investor and other interests within the range of the statute is advanced, or retarded, by placing the Delta system in a classification that will destroy a promising competitive innovation in the trading .of securities. Of course, if the statute were unambiguous, the Commission would have to bow. Board of Governors v. Dimension Financial Corp., 474 U.S. 361, 106 S.Ct. 681, 88 L.Ed.2d 691 (1986); American Bankers Ass'n v. SEC, 804 F.2d 739, 744 (D.C.Cir.1986). It has not been given the power of statutory revision. But in this case there is enough play in the statutory joints that its decision must be
Affirmed.