VIA E-MAIL AND
VIA FEDERAL EXPRESS
August 3, 2000
Mr. Jonathan G. Katz
Securities and Exchange Commission
450 5th Street, N.W.
Washington, D.C. 20549
RE: Proposed Amendments to the OPRA Plan
Release No. 34-42755; File No. 4-434
Dear Mr. Katz:
The Pacific Exchange, Inc. ("PCX") applauds the efforts of the staff of the Division of Market Regulation to create an equitable methodology to allocate OPRA's peak message handling capacity. The Commission notes that "...an objective capacity allocation formula is essential to ensure that scarce OPRA systems capacity is allocated among the options exchanges on a fair and reasonable basis and that delays in the dissemination of options market data to the public are minimized..." PCX would add: "and competition between U. S. options exchanges should not be restricted artificially."
The PCX concurs with the Commission's general assessment that the allocation of OPRA capacity is a significant problem. In fact, PCX has reluctantly agreed with the allocations proposed. The current allocations, based on historical data, curtail the ability of PCX and its Lead Market Makers ("LMMs") and market makers to compete by offering aggressive quotations and are, therefore, inherently anti-competitive.
PCX has constantly monitored its OPRA usage and strives to mitigate quote traffic wherever possible, but must quote actively to compete in a marketplace where 95% of PCX volume is in multiply-listed options contracts. Accordingly, PCX needs to offer its market makers adequate quotation capacity.
The proposals offered by the SEC are at first review quite interesting as they attempt to create an objective system to award OPRA capacity. However, upon more detailed analysis, we find the proposals do not deal with the current inequity in the allocation formula and, more importantly, may be subject to abuse as trading practices would be modified to affect allocation formulae. While we will detail the issues we perceive relevant to the proposals at hand, we believe that a more structural change in quotation regimes for options is appropriate in lieu of the alternative proposals.
The PCX believes that rather than allocating OPRA capacity based upon class volume calculations at each exchange, OPRA capacity should be targeted to the option series that are actively traded and that all exchanges should be able to competitively quote those series to provide investors the most competitive prices possible. This methodology would alleviate the pressure on OPRA and their vendors and subscribers to enhance systems to handle quote volume projections that far exceed known system capabilities today. This approach may be the only viable solution in light of the introduction of decimals.
The concept would be to disseminate all transaction prices as they occur but to offer auto quote prices only for those options series which meet minimum outright volume standards (spreads, conversions, and any other combination transaction would not count) or which are within three strike prices of the price of the underlying security.
The actual system impact of this concept has not been tested due to the limited time since the Commission's release. We believe it represents a methodology to utilize OPRA in the most competitive environment possible and therefore represents an extraordinarily promising concept. We would like to work with the Commission staff to explore the feasibility of the idea and, if favorably viewed, create an industry task force comprised of market makers, options exchanges, and member firm representatives (e.g., SIA Derivatives subcommittee) to develop the idea further.
Given the low cost of option evaluation software, the lack of continuous bid/ask quotations for inactive series should pose no public burden for investors. An enhancement to the proposal listed above would provide a Request for Quote capability enabling anyone to obtain an auto-quote for a specific inactive series at will.
While we believe the aforementioned concept provides the least anti-competitive methodology to allocate OPRA bandwidth, our review of the Commission's release provides the following specific comments.
Alternative A Comments:
Alternative B Comments:
We would also request that the Commission consider its approach to the issue of small entities affected by the proposed amendments. To the extent that quotation capabilities are reduced for the PCX, this affects each and every member of the PCX, and many of them are very small entities. We disagree with the statement that there would be no impact on small businesses. Our LMM, market maker, and floor broker competitive positions would be clearly impacted.
While we appreciate the Commission's initiative to alter the OPRA capacity allocations, we believe there is a superior alternative to those suggested. We welcome the opportunity to comment and hope to work further with the Commission staff.
Cc: Mr. Robert Colby
Ms. Terri Evans
Ms. Deborah Flynn
Ms. Annette Nazareth
Ms. Kelly Riley
Mr. John Roeser
Ms. Heather Treager