Division of Market Regulation:
Advisory Committee on Market Information:
Minutes of July 19, 2001 Meeting
Thursday, July 19, 2001
9:15 a.m. - 1:40 p.m.
Securities and Exchange Commission
450 Fifth Street, N.W.
Before: Dean Joel Seligman, Chair/Moderator
MR. MICHAEL ATKIN,
Vice President, Financial Information Services Division,
Software and Information Industry Association
MR. ANDREW BROOKS,
V.P. Head of Equity Trading,
T. Rowe Price
MR. RICHARD BERNARD,
Group Executive Vice President,
New York Stock Exchange
MR. ROBERT COLBY,
Deputy Director, Division of Market
MR. PHILIP DEFEO,
Chairman/CEO, Pacific Stock Exchange
MR. BRIAN FAUGHNAN,
Managing Director, Susquehanna Partners
MR. WILLIAM R. HARTS,
Managing Director, Salomon Smith Barney
PROF. SIMON JOHNSON
Sloan School of Management, Massachusetts
Institute of Technology
MR. DAVID JOHNSON (By Telephone),
Head, CBOE Trading,
Morgan, Stanley, Dean, Whitter
MR. EDWARD J. JOYCE
President and Chief Operating Officer,
Chicago Board Options Exchange
MR. RICHARD KETCHUM
Deputy Chairman and President,
PROF. DONALD C. LANGEVOORT
Georgetown University Law Center
MR. BERNARD L. MADOFF
Bernard L. Madoff Investment Securities
MR. MICHAEL MEYER,
MS. ANNETTE L. NAZARETH
Director, Division of Market
MR. GERALD PUTNAM,
MR. PETER QUICK,
President, American Stock Exchange
MR. CHARLES ROGERS,
Executive V.P., Philadelphia Stock Exchange
MR. ERIC D. ROITER (By Telephone),
Senior Vice President and General Counsel,
Fidelity Management & Research Company
MR. MICHAEL SIMON,
Senior V.P., General Counsel,
International Stock Exchange
MR. CAMERON SMITH,
General Counsel, Datek Online Holdings
DEAN JOEL SELIGMAN, Chair/Moderator
Washington University School of Law
MR. MARK TELLINI,
Senior Vice President,
C O N T E N T S
Dean Joel Seligman
I. Presentations on Options Market Issues
A. Annette Nazareth: Differences in Regulatory Treatment of Stock Options Market Data; Current SEC Issues
B. Michael Meyer: OPRA Issues
C. Michael Atkin: Vendor Issues
D. Brian Faughnan (SIAC): Technological Issues
Should our recommendations for the options markets differ from our recommendations for the stock markets? If so, in what respects?
Does the greater volume of options market data
necessitate a different type of transparency
than for market data of the underlying stocks
(e.g., less transparency for less actively-traded
options series; a "request-for-quote" system;
strategies for "flickering" quotes)? How should
capacity concerns be addressed, both at the
consolidator and vendor levels?
B. Consolidated Information
Should the Display Rule be extended to the
options markets? To what extent would mandatory
dissemination of an NBBO mitigate capacity
concerns? Should options market participants
be permitted to distribute separately information
beyond the mandatory minimum?
C. Single vs. Competing Consolidators
Does a majority of Advisory Committee believe
that the competing consolidators model should
be introduced in the options markets? Would
the volume of options data, and the related
capacity issues make entry by competing
consolidators more difficult?
D. Improvements to Existing Model
What improvements would those recommending
retention of the single consolidator model
suggest for the options markets? Should
they differ in any way from those recommended
for the stock market?
E Other Issues
P R O C E E D I N G S
MR. SELIGMAN: This is our final meeting of the SEC
Advisory Committee on Market Information. As with all of our
meetings, the public will have an opportunity to comment or
post questions at the conclusion of the committee discussion.
We anticipate this meeting will be finished before
a late lunchtime, approximately 1 p.m. We'll have about a
15-minute break a couple of hours down the line.
Our topic today is market information in the
options context. And in a couple of very significant
respects, this context is different than equities. Because
of capacity issues, because of settlements of various
underlying litigation each of the option exchanges has made
proposals to the Commission which, at the moment, are not
public and, at the moment, are being discussed between the
exchanges and the Division of Market Regulation.
To some degree, I suspect, the discussion today
will reflect aspects of consensus that has been arrived at
within the discussions with OPRA and the discussions among
the options exchanges, but I have not seen those proposals,
nor would it be appropriate for the SEC representatives to
directly paraphrase them.
So that, in one sense, we're operating much more in
a work-in-progress mode today than we were with equities. In
a second sense, there is an ongoing arbitration concerning
Reuters that deals with market information as well.
As was indicated at earlier meetings, it is not the
purpose of this committee to weigh in on any side with
respect to that particular ongoing arbitration, and,
hopefully, today we won't see a rehashing of positions there.
There has not been, obviously, a final conclusion to that as
Now what I would like to do at the beginning of
today's meeting is to lay out in some detail the distinctions
in factual context and legal context between the options and
the equities. We gave some thought to this. We decided to
have four presentations.
We're privileged, as always, to have the Director
of Market Regulation, Annette Nazareth, with us to present an
articulation in the differences in regulatory treatment of
the stock and options market, and that will give us, kind of,
overriding legal context.
And then, from OPRA, Mike Meyer is going to lay out
options issues and try to highlight to some degree on behalf
of the options exchanges how they see factual differences.
Mike has a handout that summarizes his comments, which many
of you will want to see, if you haven't received it yet.
Mike Atkin is then going to focus on a perspective
from the point of view of vendors. Committee members should
already have received a copy of his distribution, and, if
not, there are additional copies available.
And finally, Brian -- is it Faughnan?
MR. FAUGHNAN: Faughnan.
MR. SELIGMAN: Faughnan. Forgive me. I've just
been calling you Brian -- will focus on technological issues.
After that we'll take a short break, and then, as a group,
we'll discuss the policy recommendations we'll make to the
Commission for the balance of the meeting.
Let me now turn things over to Annette.
MS. NAZARETH: Thanks Joel. I thought I would give
you a bit of background on the regulatory and what derives
from that, the factual differences between the options market
data and equity market data and, hopefully, this background
will help us in assessing the extent to which the
recommendations of this committee will differ, if at all,
between the options markets and the stock market.
Just to give you a little bit of background, as,
obviously, most of you are aware, standardized options began
trading in 1973 with the Commission's registration of the
Chicago Board of Options Exchange as a national securities
And as trading in options grew, the Commission
approved options trading on other exchanges as well, and
today standardized options trade on five exchanges -- the
AMEX, the CBOE, the ISE, the Pacific Exchange and the
Philadelphia Stock Exchange.
Stepping back a bit, I thought I'd take just a
couple of minutes to discuss the development of options
trading. In the mid-1970s, as options trading was
experiencing rapid and substantial growth, concerns about
trading in sales practice abuses arose, and by July of 1977
the expansion in listed options trading, including trading
certain options trading classes on more than one exchange,
led to allegations that there was manipulation in the market
for exchange-traded options.
And in response to that situation, the Commission
requested that the options exchanges voluntarily refrain from
listing any options classes beyond those already listed as of
July 1977, and it initiated an investigation and a special
study of the options market in October of 1977.
The Options Study outlined several familiar
issues -- some things never change -- to be explored in the
options market, including comprehensive quote system for the
dissemination of firm quotes, market linkage, an order
routing system to enable the best execution of orders, a
nationwide limit order protection rule to ensure that agency
orders received auction-type trading protections, and off-
board trading restrictions.
In 1980, the Commission ended its moratorium on
expansion of standardized options trading and solicited
comments on several profession to more fully integrate the
options markets into the national market system.
And in 1989, as you know, the Commission adopted
Rule 19c-5, which generally prohibited an exchange from
adopting rules that would limit its ability to list any stock
option because that option was listed on another exchange.
Turning now to the regulatory treatment of the
options market information, the production of consolidated
market data information began in 1976 when the Commission
approved the Options Price Reporting Authority's, or OPRA,
registration as a SIP, or Securities Information Processor.
As initially approved, OPRA functioned as the
administrator of a consolidated system for the collection and
dissemination of reports of all completed transactions for
all exchange-traded options. And then, in 1981, the
Commission approved the addition to OPRA's functions of the
collection and dissemination of consolidated quotation
information for options, and at the same time the Commission
approved the OPRA plan as a national market system plan.
Many of the other national market system
initiatives that were embodied in Section 11A of the Exchange
Act were implemented in the stock market at a time when
standardized options trading was relatively new, and as a
result those same provisions were not imposed on the options
In particular, when the Quote Rule was adopted for
the equity securities in 1978, standardized options had only
been traded for a few years, and so the Commission did not
extend that to options at that time.
Similarly, when the Transaction Reporting Rule and
the Display Rule were adopted in 1980, they, too, were not
applied to the options markets; thus, the options markets
were not required by SEC rule to collect and distribute and
"trade" information, and vendors and broker dealers were not
required, again by SEC rule, to provide consolidated options
In subsequent years, the Quote Rule, the
Transaction Reporting Rule and the Display Rule also were not
formally extended to the options markets in part because
their purposes were largely achieved through the provisions
of the OPRA plan.
As I mentioned, OPRA was already distributed
consolidated quote information and transaction information,
and, in addition, the non-discrimination provisions of the
vendor agreements required by the OPRA plan effectively
achieved the purposes of the Display Rule by requiring
vendors to disseminate consolidated data.
Today, the options markets continue to operate with
limited market integration facilities. The Commission has,
however, as many of you in this room know, taken several
recent steps to more fully integrate the options markets into
the national markets system.
For example, the Commission adopted amendments to
the Quote Rule, which became effective in this year, that
formally extended it to transactions in listed options.
Among other things, the amendments require the options
exchanges and the options market makers to publish firm
The amendments were distinguishable in certain key
respects, those from the provisions that apply to equities;
for example, because of capacity concerns, the options
exchanges can elect at this time not to collect and make
available the size associated with each quotation in this
adoption. Instead, they may establish by rule and publish
the size for which the best bid and offer in each options
series is applicable.
In another step to integrate options trading into
the national market system, the Commission recently adopted
execution quality and order routing disclosure rules. And
one of those rules, the Order Routing Disclosure Rule,
currently applies to transactions in options as well as
equities. And that rule became effective at the beginning of
this month and, as you know, requires broker dealers to route
customer orders -- that route customer orders in stocks and
listed options to make publicly available quarterly reports
that identify the venue to which customer orders are routed
The other rule, the Execution Quality Disclosure
Rule for market centers, was not applied to the options
markets, and that was in large part because currently there
is no consolidated NBBO for listed options, and many of the
calculation done under that rule require an NBBO.
The options exchanges, again, don't currently
distribute an NBBO through the OPRA system; rather, each
exchange calculates a best bid and offer for use by its own
market. Because each exchange generally obtains quote
information from the other four exchanges from OPRA and
incorporated it into their quote directly, each OPRA exchange
today is potentially using a slightly different best quote at
any point in time.
As part of the reform of OPRA, however, the
participant exchanges have agreed that an NBBO should be
calculated by OPRA, but they have not yet come to agreement
on how to do so. Indeed, one of the issues that seems to be
debated at this point is whether an NBBO distributed through
the OPRA system should indicate the market on which the NBBO
With regard to the display of customer limit
orders, the options exchanges currently are not subject to
the Limit Order Display Rule, but some of the exchanges
recently have filed proposed rule changes to adopt such
requirements in their own markets similar to our Limit Order
Finally, the provisions of the OPRA plan mandate
that the exchanges disseminate options market information
only through OPRA with some narrow exceptions to permit
electronic facilities to operate. We currently have before
us an amendment to the OPRA plan that would permit the
options exchanges to separately distribute their data so long
as recipients of the consolidated data also receive full
quote information or, ultimately, if there is an NBBO, that
they would also receive an NBBO.
In addition to trying to better integrate the
options markets into the national market system, the
Commission and the options industry recently had been
devoting much attention to concerns about the capacity of
options market information systems.
All the transactions executed on and all price
quotations for options generated by each option exchange are
communicated to the public by OPRA through the facility of
its exclusive process of SIAC. Market data is sent to OPRA
and distributed to market data vendors on a consolidated
basis for use by options markets participants, including
retail investors, broker dealers and the exchanges
Thus, SIAC and all the options markets participants
as well as the communications lines between them must each
have sufficient capacity to handle options market data. Note
how this market data dissemination regime is distinguishable
from equity securities. OPRA does not distribute an NBBO, as
is the case in the equity markets, and pursuant to the terms
of the OPRA plan the quotes of every options market must be
distributed by vendors regardless of the market where the
quotation took place, which is the language from the OPRA
This situation poses unique issues in the options
market. 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. As of May, there were
approximately 377,000 open options series traded on the five
options exchanges for which two-sided quotes were
disseminated continuously through the OPRA system.
Quote message traffic represents the vast majority
of the options message traffic that is generated. Generally,
quotes are generated automatically for individual options
series based on changes in the underlying stock price or
In other words, every time a price changes for a
particular equity security, the quotes of all 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 surprise the
reliability of utility of options market data disseminated to
market participants, including retail investors.
As options message traffic has increased over the
past few years, OPRA has directed SIAC to implement systems
enhancements to accommodate additional message traffic. In
addition, the options exchanges have individually implemented
a number of internal quote message mitigation strategies,
and, in November of 2000, as a result of growing concern that
the option exchanges will be unable to agree on how to
allocate capacity during peak usage periods, the Commission
adopted as a short-term solution amendments to the OPRA plan
to establish a methodology by which limited OPRA system
capacity available would be allocated if necessary.
The OPRA system capacity has recently been expanded
to equal approximately 24,000 messages per second.
Fortunately, peak usage to date has been just over 7,000
messages per second. Despite existing excess in OPRA system
capacity, volume concerns persist because of vendor capacity
limitations and the potential for future increases in option
The options exchanges are continuing to explore
permanent industry-wide solutions to the capacity problem,
including the development of a request for quote system, the
imposition of industry-wide limitations on options products
that may be listed based on numeric criteria and the use of
I hope this gives you some grounding in what the
issues are concerning the options markets. I'm sure there
will be some overlap between what I said and those who
follow, but hopefully this provides us with some base on
which to make our judgments in comparing what should be
necessary for the options markets. Thank you.
MR. SELIGMAN: Thank you, Annette. Are there
questions from the Committee?
MR. SELIGMAN: Okay. Let me now turn, then, to
Mike Meyer. And I'd ask at the beginning of his
presentation -- oh, I'm sorry.
MR. HARTS: I'm sorry. Annette, you mentioned that
there's this issue about an NBBO being disseminated
displaying which exchange has the best bid and offer. Is
that the sole remaining barrier to approving that or to
reaching an agreement?
MS. NAZARETH: No. I think there are others as
well, but that was one that I thought was worthy of note.
MR. SELIGMAN: Let me turn to Mike Meyer, then, at
this point, and ask if he could introduce -- do you want to
speak from over there? I think it might be helpful -- if
you'd like -- because of sight line issues, if you could
introduce the representatives from the various options
MR. MEYER: Thank you, Joe. I am Mike Meyer, and
I've been counsel to the Options Price Reporting Authority I
guess since sometime in the late '70s, just the other day, I
guess, it seems like to me. And there are a number of other
people here who probably know more than I do about market
information and options.
Several of the options exchanges have been
represented on your committee right from the beginning. The
AMEX, Peter Quick is here; CBOE, Joyce; ISE, Mike Simon; and
now Charlie Rogers from the Philadelphia Exchange is at the
table. And Joe Corrigan, who is the executive director of
OPRA, is in the audience. Oh, and Phil DeFeo is also here
from the Pacific Exchange.
And Phil, you've been here throughout, have you
not, or are you just at this --
MR. DEFEO: First time.
MR. MEYER: First time. All right. So Pacific and
Philadelphia are added. So that's pretty good
representation. That's all the options exchanges and the
executive director of OPRA, and I'm sure those people will
provide their expert knowledge at the appropriate time.
I've prepared a brief outline of what I'll say.
I'll try and keep the whole thing short. Joel told me to
avoid cliches, be gender neutral and stay within the time
limits. I'm not sure about the first two. It's hard to
avoid cliches especially, but I'll try and stay within the
I did put something down in my outline about the
really early history of OPRA, which is probably more
interesting to me than anyone, because I lived it. The only
point that's to be made there, I think, and this is a theme
that I hope will echo through my brief remarks is, really,
options are not different from equities in terms of the
benefit to investors of transparency, a benefit to investors
of access to market information.
And I believe the SEC right from the beginning
recognized the significance of transparency in the options
market. Indeed, that was one of the motivating factors for
the initial approval of CBOE's proposal, because up to that
time put and call options had been traded in a largely
invisible over-the-counter market through the Put and Call
Broker Dealers Association where the closest thing to
transparencies were, anybody around old enough to remember,
little advertisements that used to appear in the Wall Street
Journal listing the prices at which puts and calls would be
And CBOE said as one of the reasons why its
registration should be granted would be for the first time it
would offer transparency. It would have, at the beginning,
last sale reporting, real time last sale reporting.
When the AMEX, in '74, I believe it was, proposed
an option market, that was at the same time that national
market system notions were about. Congress was debating what
ultimately became the '75 amendment itself to the Exchange
At that early time, the Commission recognized the
importance of transparency in options, and that's what I
refer to here as really the earliest evidence of this was Lee
Pickard, who was then the director of -- I can't remember
whether it was called Trading in Markets or Market
Regulation. It may still have been called -- but anyway,
Annette's predecessor wrote a letter and said both the AMEX
and the CBOE had to "satisfactorily address," that was the
term, a number of issues.
One was common clearing, and that led to the
Options Clearing Corporation. Another was a common tape for
last sale reporting. That was even before the AMEX began to
trade, and it was in recognition that there would likely not
be much, if any, multiple trading at that time, so therefore
not much to consolidate, maybe nothing to consolidate.
But with all the focus on national market system,
the Commission decided wisely, I believe, that with options
it had a chance to start with a clean slate, and it wanted
the structure of the options market to have in place
mechanisms for consolidated reporting, so that, when the time
came that there would be the same option traded on more than
one exchange there wouldn't be the need to retrofit
consolidated reporting into that, as was the case for stocks.
So that was the "satisfactorily address" letter,
and that led directly to OPRA. And even though, as Annette
described, the history of when OPRA filed what, under which
rule, and when it became registered is what arcane and
reflects the fact that the '75 amendments came along, and the
Commission adopted new rules, the OPRA plan and OPRA itself
go right back to the earliest days of options trading on more
than one exchange and was, indeed, a condition to the AMEX's
beginning and the condition to the CBOE's expanding what was
a ten-series pilot.
So much for history. Certain SEC rules, in fact
most of the SEC rules that apply to market information and
stocks, at least in their inception, did not apply to
options. That's not because there was some sense that
transparency was less important for options, as I hope I've
just made clear, but largely it was either because of kind of
a fear of the unknown -- options were something new, and it
wasn't clear what would happen if these rules that applied to
stocks applied to options -- or because, in some cases, it
simply was not at that time practical to apply the rules to
So for example, the Quote Rule, when the Quote Rule
was first adopted, there was not yet the systems in place for
auto quoting a multiple series of options, and the fear was
that if a Quote Rule applied traders simply wouldn't be able
to live within that rule. They couldn't possibly manually
update the quotes in all of the series that they were trading
in order to be firm on those quotes. So the Quote Rule
simply didn't apply.
But as soon as the systems became available that
enabled the traders to maintain quotes in all of those
series, the auto quote systems, the exchanges themselves
without any particular prodding from the Commission but,
rather, in response to competitive conditions in the market,
implemented those quote systems, and OPRA amended its plan to
accommodate quotes, and under exchange rules those quotes
became firm. So that's how quotes became a part of the
The main distinguishing characteristic, I think, of
options from stocks are the fact that options are traded in
these multiple series. So that for any single stock, an IBM,
whatever, you have a bid and an offer at any point in time.
With options, you have a bid and an offer for each series in
And as others have and will describe to you,
particularly in volatile times, when new series are open,
when stock prices move, the old series don't go away until
they expire, and before you know it you have hundreds if not
thousands of series being quoted. That leads to this
enormous amount of data.
I'm not a Power Point presenter. I don't have a
lot of graphics, but I do have at the back of my little
outline a couple of charts because they simply illustrate
graphically what has happened to message traffic, over the
The first just shows the general explosive growth
in options message traffic going back to 1995 and up to the
present. The second chart is much the same; it just shows it
in terms of peak messages. And the third chart compares
options messages with CT and CQ.
I guess, to be fair, in this chart you really need
to add the CT and CQ, because CT is the last sale, and CQS
are the quotes; whereas, options are both last sale and
quotes, but quotes are largely what options are. You can see
it's just orders of magnitude greater in the case of options.
What has accounted for the growth in message
traffic in options has been a number of things; first, just
the fact that it started as a brand new business at zero, and
the market as grown, more options, more classes, more
exchanges, more traders, therefore, more message traffic.
Add to that the expansion of multiple trading a
couple of years ago where suddenly many more classes and
series are traded on many more exchanges each of which is
generate its own quotes, that has caused the growth.
On top of that, add the fact that, unlike in the
stock world where there is often a primary market and other
exchanges simply echo or some say ape the quotes in that
primary market, there really is no single primary market in
options. Each exchange is quoting its own series the way it
sees fit, and they change on each exchange not in relation to
what happens in some primary market. That leads to many more
and different quotes from time to time.
Then, finally, decimalization has certainly had its
impact on increasing message traffic in options. When you
look at all of these factors and consider how much message
traffic has grown, I'll say, and hopefully not too
defensively, that I think OPRA and SIAC have done a really
terrific job in keeping ahead of that enormous growth.
Any business that grows at this rate is going to
have capacity problems from time to time. If you build too
much capacity too soon, you can't afford. Your customers
can't afford it. And if you don't build enough capacity, can
you go out of business.
OPRA and SIAC have done, really, a pretty good job
and have kept ahead of the capacity curve almost all the
time, although there was a period, and Annette referred to
it, a couple of years ago, when there was a capacity crunch.
It was the combination of all these factors and particularly
the expansion of multiple trading. There were days -- and
very volatile markets, I should add, at that particular time
where there were queues in the OPRA line. There were delays,
not often, but it should never happen.
I think it's fair to say that those problems, at
least for now, are behind us. The solution to the problems,
for the most part, consisted of building a bigger system, and
OPRA has done that. So that when it has a system today
that's capable of handling 24,000 messages per second and is
scheduled to go up to 38,000 and when its peak has been
somewhat over 7,000, there's a lot of head room there.
Really, there is no capacity problem today at OPRA,
or at SIAC. It's another question as to how vendors and end-
users can handle that amount of data. But of course, today,
although the system is at 24,000, the actual message traffic
is substantially less than that.
The only thing on the horizon that could
dramatically increase options message traffic might be if
options were traded in pennies. And I think others may speak
to that, but I don't think there's a whole lot of support for
moving in that direction, to the contrary. But beyond that,
I think most of the big changes are behind us, and I think we
have an OPRA system that can handle its capacity.
I'm going to talk some more about capacity issues,
however, it's kind of, the centerpiece of, I think, what
you're all concerned about. Just a couple of other things
before I get to that. I, kind of, departed from my outline a
OPRA is governed slightly different from CTA/CQ; I
think reflecting its history and reflecting the fact that
there's no single dominant primary market in OPRA. OPRA is a
committee of exchanges. Each exchange has one vote on the
committee. There is no network administrator on OPRA. No
one exchange has any greater authority than any other.
OPRA is administered by a staff of full-time
individuals headed by Joe Corrigan, who is here, its
executive director. Nominally, those persons are employees
of the CBOE. Originally, they were employees of the AMEX
when OPRA was first organized, and it was simply decided to
move that function to Chicago with AMEX's full support at the
time, but that's nominal.
That's simply because OPRA itself, unlike CTA, is
not an association, nor an entity. It's simply a committee
of exchanges, and it cannot itself employ anyone. It doesn't
have a taxpayer identification number, and what have you.
So, CBOE is the nominal employer. Each exchange
has one vote on OPRA in every respect, except, a peculiarity
of the plan is there is a weighted tie-breaking vote, and
that has never happened. In other respects, OPRA is much
like CTA. It charges more or less the same. The revenue is
shared, and the basis of volume more or less the same.
There is one difference here, and that is OPRA has
always presented itself more simply, I think, to the vendor
community than CTA; that is, OPRA has a very simple schedule
of fees, of vendor fees, subscriber fees. It doesn't matter
how the vendor uses the data. It doesn't matter how the
subscriber uses the data. The fees are, essentially, the
So there's less need for vendors and subscribers to
describe to OPRA what they do with data. They don't have the
same administrative burdens in maintaining their relationship
with OPRA, as some of them have described for CTA.
Back to capacity just a little bit, and then I'll
be, kind of, winding up my remarks. Although OPRA has not
been subject to the Commission's Display Rule -- I think for
the same reason that it hasn't been subject to other
Commission rules when those rules were first adopted. The
Display Rule requires collection of size, and OPRA still
doesn't show size of its quote -- nevertheless, the OPRA plan
right from the beginning has had its own Display Rule which
the Commission approved, and therefore indirectly is a
Commission requirement pursuant to the OPRA plan.
The OPRA Display Rule simply says that a vendor, in
redistributing options information, in effect, has to display
consolidated information. It cannot display information
selectively from less than all of the markets that trade a
Subject to that requirement, under the OPRA plan
and under the vendor agreements, the vendors are free to
filter, limit the data any way they want. Vendors can show
options data for the near months only, for the most active
underlying stocks only, or any other way that they may think
it's in their interest to provide a service they can surely
show less than everything. They simply cannot filter by
market center in a multiply-traded option.
That may be significant in helping relieve vendors
of the downstream capacity burden. Annette mentioned that
OPRA is considering developing its own NBBO service, and it
certainly is. And I think it's fair to say -- and any of the
exchanges can correct me if I'm wrong -- that there really is
agreement among the exchanges on all aspects of that OPRA-
provided NBBO service except the issue of whether to show a
market identifier or not. And while there is a majority and
a minority view on that, it hasn't been resolved.
The unresolved issues, if any, are simply that that
determination currently is bundled together with a number of
other initiatives to make changes to OPRA some of which are
in response to the settled enforcement cases, and others are
simply in response to what OPRA sees as its needs. And there
isn't agreement on all of those other things.
And to the extent that NBBO is bundled with all of
those other things, then they all have to be resolved before
the NBBO goes into place. Even on those others I don't
think -- I don't want to overstate the differences -- There's
largely agreement on everything. The devil is in the
details, and there still is some disagreement on some of the
If OPRA provides an NBBO service, that won't have
any impact on OPRA's systems because SIAC is still going to
have to capture all of the quotes from all of the markets and
process them, indeed process them one more way than it does
today by reading those lines and identifying the best bid and
offer at any point in time.
So there will be no reduction in the size of the
OPRA system itself on account of NBBO. On the other hand,
the OPRA system is quite large today and is capable of
Downstream, however, where vendors and end-users
may have difficulty receiving so much data they will have one
more alternative; namely, subscribe to an NBBO service only.
And if they do that, although I don't know the technical
answer how much of a reduction will there be, and I don't
know whether -- Brian Faughnan of SIAC may give an educated
guess on that -- but just intuitively it ought to be a
substantial reduction in data, if all you're seeing is an
The NBBO will change and change frequently but not
as much as all of the quotes from all of the exchanges. So
that ought to provide some substantial relief.
That ties to something else that I just want to
talk about, and then maybe I'll stop talking. This committee
has considered the question of competing consolidators or a
single consolidator. OPRA, as does CTA, today follows the
single consolidator model, and at least thus far within OPRA
there hasn't been any initiative to move away from that
Personally, I think that it's the best model for
options. I won't go beyond my focus and talk about what I
think on equities, but for options I think it's the best
model for some obvious reasons.
One is given the capacity needs of OPRA, it's
costly to build a system of the size of the OPRA system, and
to have to build a system of that size more than once over
again really multiplies those costs to a point that it's just
likely to be unacceptable.
If a particular competing consolidator looked at
the world of OPRA and said, "Well, 7,000 is your peak. I
don't need to go to 24- or 38,000. I'll build a 10,000
messages per second system and not spend so much money," now
you'll have a situation where one consolidator system is
different in size from account, and if we should get another
capacity crunch one consolidator will queue when the other
consolidator didn't queue. Different investors will see
different things about the options market.
At least even during the period when we had
problems no particular market was advantaged or disadvantaged
as compared to anyone else. No investor was advantaged or
disadvantaged. Everybody saw the same single feed, and when
it queued, unfortunately it queued for everyone. It's just
hard to imagine a world where some consolidators were showing
different data from others.
I also think it's wise and safe to build a system
with as much head room as OPRA has done, and that's,
obviously, more affordable if you only have to do it one time
and not many times over.
An argument in favor of competing consolidators
that I've read, I guess, is that it promotes competition and
innovation. OPRA, at least is considered ways to accomplish
the same thing in reliance on its NBBO service and by
relaxing what Annette referred to as the exclusivity
requirement of a plan; that is -- and this isn't in place
yet, but it certainly could be and is actively being
considered -- if it were permitted, for exchanges, vendors,
others to provide options information outside of the options
system, so long as some minimum consolidated information
accompanied that and that minimum could be nothing more than
the consolidated NBBO, then that ought to allow exchanges and
vendors to respond to market forces and innovate and create
value-added services for which they perceive a demand. But
at the same time, there would always be a single
authoritative official source of a consolidated NBBO.
That's the direction that we're moving, and we look
forward to finishing that work. One more thing. When we
experienced the capacity crunch of a couple of years ago,
that was a difficult time, and I think we learned from it.
When there was a limitation on OPRA's capacity and
the demand exceeded it, the exchanges needed to allocate that
capacity among themselves. That proved to be difficult to
accomplish because the exchanges compete with each other, and
it's a zero sum piece of pie, not avoiding cliches despite
Joel's warning. One exchange gives up a piece of pie, the
other one gets it.
Nevertheless, with the Commission hanging around
and knocking heads together, with difficulty the exchanges
were able to allocate capacity to the extent they needed to
get through that difficult period.
It was with that in mind, that the Commission then
imposed its own formula for allocating capacity as an
amendment to the plan, but with all respect the horse had
already been stolen, and then the barn door got locked with
that formula. Another cliche.
MR. SELIGMAN: That's three.
MR. MEYER: But they've all been gender neutral, if
you noticed. We've never had to use that formula and likely
never will because we have so much capacity today, and
there's just no need to allocate.
Going forward -- and I won't take the time to wind
together the strands from the enforcement settlement and the
capacity needs which were, more or less independent of each
other but just happened to occur at the same time.
OPRA has a plan going forward for dealing with
capacity that ought to obviate the need ever to allocate
either pursuant to the formula or in any other way. And in
simple terms, it allows each exchange, in effect, to inform
an independent authority, which will be the Independent
System Capacity Authority, or ISCA, if you will, how much
capacity it needs.
This independent authority will build the system
through the processor, SIAC or whomever the processor may be,
to satisfy the needs of the exchanges as communicated. Each
exchange will pay for the capacity that's requested.
The independent authority has authority not to
build all of the capacity required, if it thought that it was
truly excessive and would impose costs on OPRA or the
industry that they shouldn't have to bear. But in the
ordinary case it wouldn't be expected to exercise that
authority. It would be expected to do what the exchanges
asked it to do.
That's an effort to put the capacity decisions into
each exchange's own individual control for themselves. There
are questions of sharing, and there will be sharing in order
to make the thing work efficiently, but that's the direction
that we're moving. That, too, is part of this bundled
amendment where there's still some details to be ironed out,
but we're moving in that way.
So Joel, maybe that said I'll stop and be happy to
respond to any questions now or later.
MR. SELIGMAN: Let me open it up to the group.
Would they like to pose any questions to Mike at this point?
MR. HARTS: Bill Harts. I had a question about the
graph and your peak rate. You're saying that now you can
handle -- or you're about to be able to handle 24 or --
MR. MEYER: Can now handle 24,000, and 38,000 is
the next step, which I think is going to be before the end of
this year. Is that right, Joe? Third quarter of this year.
MR. HARTS: And is that per second or per minute?
Because on the --
MR. MEYER: Per second.
MR. HARTS: -- graph it shows one minute peak rate,
or is that supposed to be one second?
MR. MEYER: Well, that's a good question. I can
tell you I think it's the peak in messages per second over a
one minute period of time. So you take -- it's the averages
over a minute, because you can get down to a microsecond, and
it might come in higher than that.
So to make it meaningful you slice the time up into
minutes, and then you average the rate for each minute, and
highest we've experienced is 7,000 messages per second as an
arch over a minute.
MR. HARTS: So over the course of that minute there
were actually 420,000 --
MR. MEYER: If you've multiplied it by 60, that's
what it would be.
MR. SELIGMAN: Any other questions for Mike? Mike
MR. ATKIN: Maybe I misinterpreted something, but
you said that the current peak is around 7,000 messages per
second, and you said that most of the big hits on increasing
traffic were over, yet the projection is for 24, and then
after that is 32 and then 52. Is there some change that has
occurred that would have some impact on those projections now
that's different from previously?
MR. MEYER: Well, I think that the system is as
large as it is first because we know that our projections are
imperfect and that there can be events; for example, short-
term events, that create great volatility and activity in the
market that can give and you peak over a short period of
time, some news event -- Greenspan does something -- what
So we have to build for that, but also you hope to
not have to be changing this year to year to year. There has
been an overall growth in the options market. The exchanges
expect that growth to continue. So looking longer term they
need to build a system to handle the long-term growth.
What I meant was that the systematic changes that
raise the level instantly to a new plateau seem largely to be
behind this except for the possibility of trading in pennies.
MR. SELIGMAN: Other questions for Mike Meyer at
MR. SELIGMAN: All right. Mike, why don't I invite
you to take a chair and sit with us at the table.
MR. MEYER: Thank you.
MR. SELIGMAN: Let me ask Mike Atkin if he could
make a presentation.
MR. ATKIN: During the conference call in
preparation for this meeting which, of course, I was on
because I thought we were talking about the final report,
which turned out not to be even on the agenda for this
meeting, I was surprised with a request by the Commission to
do a survey of vendors and users and to try to summarize the
issues related to capacity. And of course, I was delighted
to help in any way.
At a minimum, as a result of this research, I
learned a little bit about options markets, which I really
had not much understanding before, and I was flooded with
statistics and opinions from both user firms and vendors.
And I think it's clear to say that there's absolutely no
shortage of passion about this issue out there within the
I'll also say that in addition to passion there is
a lot of excellent research on options traffic mitigation
strategies. As I indicated in my memo, I am clearly not an
expert in options market data, but I now find myself in that
most difficult of situations of having just enough
information and understanding to be dangerous.
I also learned this morning that there was some
conflict in the findings that I had in my report and what I
learned from this morning's discussion. I certainly have not
been able to reconcile those conflicts, and in listening to
Mike speak we might be in violate agreement on many of the
things that are in my report.
In order to get a passing grade from our professor
over here, I spoke with eight vendors, ADP, Bloomberg,
Bridge, MoneyLine, Reuters, S&P, Telekurs and Thomson. I
spoke with five user firms, Fidelity, Goldman Sachs, Lazard,
Merrill Lynch and UBS. And I spoke with two consultants.
One is T. Williams, who is sitting here in the audience who
was involved in doing the SRI consulting research study on
options mitigation, also involved in decimalization issues.
And Charlotte Cooney from Jordan & Jordan, who is doing a lot
of work with SIA on decimalization.
I also sent my report to everybody I talked to. I
sent it to our executive committee. So I feel pretty
confident that the findings have been at least scrutinized
and generally verified.
That being said, there was a surprising degree of
consensus amongst vendors and users on most, if not all, of
the conclusions in our memo. I feel safe in reporting that
there is a high degree of concern about both the growth of
options traffic and the management and usefulness of options
market data currently being disseminated.
Without exception everybody we spoke to is working
hard to upgrade capacity, to upgrade bandwidth, to upgrade
their processing power to meet SIAC projections. I do not
believe, however, that at the present time the industry is
ready to fully handle the current 24,000 messages per second
projection into their distribution platforms.
Also, to say that there is a clear distinction
between how options traders and market makers view options
data and how the rest of the industry views options market
data, in general, the options traders want every bit of data
they can get their hands on for both the development of
theoretical indications of market conditions and to meet
their regulatory requirements for evaluation.
That being said, most everyone, perhaps even
including the options traders, believe that the majority of
quotes, specifically the "away from the market," the "out of
the money," the individual exchange specific quotes, which,
in my discussions the phrase "nothing more than free
advertising" came up every time are, to be kind, considered
less than useful.
The other consistent concern had to do with the
lack of communication between the exchanges and the industry
on both quote mitigation strategies and on capacity
projections. The gap between projections and reality seems
to be fairly wide. The cost of upgrading systems to meet
projections is fairly high.
I guess one of the main conclusions is that the
importance of a good and honest dialogue, if allowed, cannot
be overstated. On a side note, I'll apologize for putting a
little short course on options traffic in my memo. I did
that because I thought there might be people like me who had
no clue about how the options market worked.
One of the key points, however, is not only how the
options pricing process works but the impact of corporate
action information such as splits and mergers on options
pricing and options data maintenance.
I got deluged with statistics and projections and
scenarios from every side. I tried to put them in context
for my memo. In broad terms, I think these are the most
relevant ones. Options pricing is about 70 to 80 percent of
U.S. market data traffic. Somewhere between 20 and 30
percent of opposites series have no open interest.
Zero open interest and zero volume account for a
lot of quotes, perhaps as much as 60 percent or even more of
total volume. Away from the market quotes, resulting from
multiple listings, account for about 25 percent of volume.
So if I got the statistics right and I add it up
correctly, that's somewhere over 70 percent of options quotes
are considered not particularly useful by the people that we
talked to. The other alarming statistic had to do with the
quote to trade ratio for options, particularly with fully
electronic exchanges such as ISE, accounting for a
significantly higher ratio of quotes to trades than the other
If that trend is, then, for other exchanges to go
more electronic, you can assume that ratio will increase, and
hence data traffic will increase.
So what does this mean for vendors and for users?
I think there are really two issues that were identify. The
first had to do with the costs of data collection, processing
and distribution. And the truth is that upgrading systems to
handle increasing traffic projections is a costly thing for
both vendors and users.
The key here, however, is not really about the cost
of doing business. Vendors readily admit that they must be
able to handle all of the data that's thrown at them. No one
is complaining about that business requirement. That's what
And users also readily admit that they expect their
vendors to be able to handle everything that SIAC throws at
them, and they also expect to be able to up grade their own
internal systems to be able to handle all the data that's
The issue here, I think, is really twofold. First,
is all that data really needed? And then second, if it is,
what are the real projections on capacity so they can plan
appropriately. The core message that I walk away with is
that no one wants to haul around what they termed as useless
data, and then making sense of all of that huge volume of
data, as you put it into your databases and into your
calculations is not a significant undertaking.
The second and perhaps most important perspective
from the vendors -- and I should clarify this is only about
data feed vendors. There really is no issue for stand-alone
terminal vendors that I could find. The issue is about their
desire for flexibility in creating useful services for their
And I guess, Mike, this is where I seem to have a
conflict with what you were saying. Vendors say that most of
their clients don't want the raw OPRA feed. Many can't
handle the volume of data. Customers want the vendor to be
able to deal with all those data processing issues by
filtering and by differing timely and accurate quotes on a
variety of criteria, whether it be by contracts they're
interested in or by fresh quotes or by NBBO or by whatever.
The core of the problem seems to be that requests
by data feed customers to see collective detail on just
specific options contracts results in an opening of the
floodgates internally on all streaming updates on all data.
And the vendors, more than two or three of them, said that
what they desire is flexibility to be able to tailor products
based on the specialized needs of their customers rather than
on regulatory mandate.
And whether that mandate is by the Commission or by
the exchanges I'm not sure, although there seems to be a
conflict between what you were indicating and what I found.
I did have a conversation with a number of vendors
on the range of possible approaches to address this problem.
Everything I heard, kind of, falls broadly into four
categories. The first is just deliver the full spectrum of
updates, require your clients to upgrade their systems and
processing capabilities to handle projections.
Second, vendor could manage the data by turning off
part of the data stream or by filtering the data for the
customer or by providing the customer with publish and
subscribe tools to manage the data internally, although here
I found a very big conflict between options traders
requirements within a firm and the rest of the users within
The vendor could determine and disseminate quotes
only from the primary market. This is all without judgment
and assessment of whether this is actually possible or not.
And then fourth, the vendor -- this is the most consistent
recommendation -- the vendor or, preferably, the consolidator
could calculate an initial NBBO and filter out all the
Let me conclude with giving you the recommendations
I heard from the people I talked with. I was, frankly,
surprised at the consistency of quote mitigation
recommendations on the things that at least this universe of
people suggest that the Commission should consider.
I should also point out that we were asked to talk
to the vendors and users. I did not talk to any of the
exchanges. So for what it's worth, this is what came out of
those discussions in order of passion.
First, I void penny increments at all costs. No
one we spoke to considered them to be of any value
whatsoever. Number two, create an official NBBO for options
with the appropriate inter-market linkages and accurate size
indicators. I should point out that this only helps reduce
traffic if you allow people to distribute only the NBBO and
not the individual exchange quotes.
Third, consider suspension or modification of the
Firm Quote Rule to reduce the need for auto quoting for out
of the money and away from the market quotes or,
alternatively, set minimum underlying price changes to
trigger options price recalculations.
Fourth, consider lounge for split services from
OPRA; i.e., either the NBBO versus full detail or separate
lines based on level of activity. It was surprising to learn
that most people project there are well fewer than 100
locations globally that want the full data stream. And, in
fact, if you say that those locations are, perhaps, multiple
locations per customer it's even fewer.
Five, consider possible strategies to prioritize
the disseminations of options based on value to end-users
such as quote by request for out of the money, deep in the
money, 4th expiration, less active options, things of that
nature, although Mike seems to indicate that's currently
And finally, provide and allow for an open dialogue
among exchanges and vendors on options traffic issues. I'd
like to re-enforce that vendors indicate that there is
insufficient communication currently and even some reluctance
among exchanges to discuss either quote mitigation strategies
or capacity projections, and this seems to be particularly
important given that projections have been frequently well
below actual levels.
So, as I indicated in our memo, if there is
anything that the Commission would like for us to do to put
some more flesh on this skeleton, we'd be delighted to do so.
And if you have any questions, I'd be more than happy to
answer them, if I can.
MR. SELIGMAN: Mike, first of all, let me thank you
for a very thorough presentation and a very thoughtful memo.
You began with a somewhat memorable phrase where you stated
that on some issues there was "violate agreement."
I think it would useful to take a look at pages 4
and 5 of your memo. I'm going to simultaneously ask both
Mikes to respond to this and see where there appears to be
agreement between, on the one has not, the vendors and users
that Mike Atkin spoke to and, on the other hand, the options
The listed six alternatives for consideration. I
think it would be very useful for us to see where there are
really differences. The first was "to avoid penny
increments." If I heard both Mikes correctly, there seems to
be general concord that nobody wants penny increments in at
least these two camps.
MR. ATKIN: Absolutely.
MR. SELIGMAN: Okay. The second was with respect
to an official, which I assume would mean by SEC rule, NBBO.
In Mike Atkin's presentation, he focuses on, I take it --
basically, paralleling what you have for equities with the
identification of the market. And I take it at the moment
you're moving towards an NBBO not by SEC rule but through the
OPRA plan, which would not have identification of the market?
MR. MEYER: Two things. First, although it
wouldn't be by SEC rule, as with any amendment of the OPRA
plan, it has to be filed with and approved by the Commission.
So, it's tantamount to SEC rule without the SEC going through
a rule-making procedure. They would have to be on board for
what it is that OPRA proposes to do.
The question of market identifier is really
unresolved at OPRA today.
MR. SELIGMAN: But at the very least, there seems
to be concord on both sides. You want an NBBO.
MR. MEYER: Yes.
MR. SELIGMAN: You want an NBBO not on an
individual exchange basis but capturing the whole industry.
MR. MEYER: Correct.
MR. SELIGMAN: And we're really dealing with a
MR. MEYER: I think that's right.
MR. SELIGMAN: And there are really two details,
and one may be more consequential than the other. One detail
is how is it adopted. The other is whether or not there
would be specific market indicators.
MR. ATKIN: Yeah. I think I just want to maybe add
to that that --
MR. SELIGMAN: Okay. And I take it both the equity
markets and the -- The manner of adoption is not significant.
It's going to be done by the exchanges with the concurrence
of the SEC, or it won't be done at all. Mike.
MR. ATKIN: However, it might be significant in
that there's currently NBBOs out there for options, and they
really want a single official uniform consistent NBBO, and
however that would occur is --
MR. SELIGMAN: And that's what we're working
toward. Okay. Third point is, basically, kind of a quote
mitigation notion. From the perspective of Mike Atkin and
the vendors and users, they think a way to reduce quote
traffic is, in effect, to suspend or modify the Firm Quote
Rule for out of the money and away from the market quotes.
Do the exchanges have any view on that one?
MR. MEYER: Yeah. The exchanges have spent a
consider amount of time recently, and it's ongoing, in quote
mitigation. There's a separate committee of the exchanges
that more or less parallels OPRA but technically is outside
of OPRA pursuant to Commission authority.
It's being facilitated by the Options Clearing
Corporation, and its solely focus is quote mitigation.
Mitigation seems to be very difficult to accomplish, and
while mitigation is one of the answers to capacity, I didn't
talk about it earlier because, really, system design is by
far the first answer to capacity. You have to have a big
The difficulty with mitigation, I think part came
out of Mike Atkin's own presentation because there's a
tension between, on the one hand, the folks that Mike talk to
saying: "A lot of this data is useless. We don't want it.
It's junk," and some of the people that he talked to saying:
"We want all the information we can get. We want
everything." It's hard to reconcile those two.
When you mitigation, that means that there are
certain series that technically are available to be traded,
but one way or another current quotes aren't being
disseminated. It's possible that someone will want to trade
those quotes, so you have a difficult choice. Do they trade
The first trade will initiate quoting. Now it's
not a sound series anymore. But how about that first trade?
Is it fair to make someone buy or sell an option when he
doesn't know -- he or she doesn't know what the current quote
So the exchanges have talked about a request for
quote system where some of these out of the money, away from
the market, distant months be quoted unless someone requests,
and then they will be quoted, and then someone can trade.
The problem is we have some indication that if we
went that route there are some people, the ones Mike Atkin
talked to who say we want everything, who will just routinely
and perhaps even automatically request. So the mitigation
won't be effective.
Mitigation is still being pursued. There are
profession to mitigation that probably will be implemented
and probably will be effective in reducing quotes, but it's
very difficult and should not be viewed as the first response
to capacity problems, in my opinion.
MR. ATKIN: If I may, my point was that you changed
the Firm Quote Rule to mitigate the need for auto quoting for
those out of the money and away from the market options.
Most of the people we talked to don't really want to tell the
exchanges how to do their business and believe that the
exchanges are capable of figuring out all the things they
need to do to manage capacity.
I think that, hopefully, they could reduce the need
for auto quoting for unnecessary information and make sure
that the dialogue between what the exchanges are planning and
what the industry itself is expecting is sufficient.
MR. SELIGMAN: This will no doubt invite some
discussion from the committee after a break, but let me just
pose one tentacle question. Is there concord by what we mean
by "out of the money"? That is, is it a euphemism, or is it
a technical phrase in the industry?
MR. MEYER: Well, of course, any call option where
the strike price is higher than the market, any put option
where the strike is below, if I've got it correct, is out of
the money. The question is by how much is it out of the
money, and it's when they are deeply out of the money that
there is less interest in these quotes.
I don't know as anyone as defined "deep," but I
don't think that would be very difficult to do. If there is
a gray area, you'd probably include the gray area until it
started to get pretty close to black, and that's where you
draw the line. I don't think that's would be a difficult
MR. SELIGMAN: When Mike Atkin spoke to his vendors
and users and they used the concept of out of the money, did
they have any thought as to how deeply out of the money they
were dealing with?
MR. ATKIN: They did. I would not be able to
recreate that discussion. There are certain people who
understand options pricing and options trading. I'm not one
of them, so I would just not be able to do the that. I have
a lot of notes I took on what that means. There are a lot of
charts on where out of the money is and where far out of the
money is. It's just not really an area that I'm competent
enough to speak to.
MR. SELIGMAN: Let me, then, turn your attention to
the fourth alternative, which you referred to as split
service offerings from OPRA. On the equity side, there was a
distinction that was drawn between what is at this point
being referred to as core data -- last sale reports, NBBO --
where there would be a mandate, and, on the other hand,
additional data that could be provided by exchange where it
would be more kind of free market capacity for customization.
Is that the kind of concept you're suggesting, that
your vendors and users were proposing on the options side?
MR. ATKIN: If you mean by "core data" the NBBO and
MR. SELIGMAN: Yes.
MR. ATKIN: In general, I think that's what people
are asking for.
MR. SELIGMAN: And again, it would be the NBBO,
though, at the moment for all quotes or quotes within a
MR. ATKIN: Joe, I just really couldn't tell you.
I'm not quite certain. People around this room know a lot
more about it than I do.
MR. SELIGMAN: Okay. Mike, do you want to comment
MR. MEYER: Well, I think this is another one of
the places where there is a violate agreement. I think this
is precisely what we're talking about in creating an NBBO
service, that that would be the required minimum call it
core, if you will, combined with last sale reports, always
combined with last sale reports.
Important for me to utter one more cliche, another
horse related one, and that is the you can lead to water, you
can lead the horse to water. OPRA imposes its requirements
and would, I believe, impose any NBBO core requirement on the
vendor only, on the redistributor only and not on the end-
user. You've got to make the information available to the
end-user, but you can't make him drink. So he can choose to
internally filter it, screen it, look at it any way he wants.
Under the current OPRA plan and contracts, that's the
situation. There's no requirement imposed on the end-user.
MR. ATKIN: Mike, what's the definition of "end-
user" versus "vendor"? How about a internal redistributor?
Is that --
MR. MEYER: Internal redistribution is an end-user.
It's an external redistribution that's a vendor.
MR. SELIGMAN: Mike Atkin, while I know you have
six alternatives let me just ask one final question with
respect to the fifth. There were possible strategies to
prioritize the dissemination of options based on value to
end-users, and you listed five separate ones.
Was there any one or two or were there any one or
two that seemed to get more support and more interest from
your vendors or end-users, or was it a sense that these were
just kind of a laundry list of ideas, and none had any
MR. ATKIN: Are you referring to my whole list of
six, or are you referring to item No. 5?
MR. SELIGMAN: I'm just focusing on item No. 5.
MR. ATKIN: It was really a single point there,
which is the concept of quote by request. And there are lots
of things you could quote by request, whether that be out of
the money, expiration month, less active options.
What, I'm a little confused in with it's a quote by
request managed by vendors or whether it's a quote by request
managed by exchanges. I was personally under the impression
it was managed by vendors, but I would defer to Mike. He
probably knows much more about it than I do.
MR. SELIGMAN: Then Mike Meyer pointed out that
some discussion with the options exchanges have had that
quote by request, and their basic sense is it might not work
for the simple reason that if a single vendor or end-user
requested it you'd have to supply all the information across
MR. ATKIN: Well, yeah. But if the mitigation
strategy was at the vendor site, then, you know, that's a
MR. MEYER: First, these criteria, No. 5, are not
surprising. These are the very same kinds of criteria that
the exchanges have considered if there is to be a quote by
request feature. The exchanges considered if there is quote
by request where does the quoting stop? That is, at one
point, just don't quote at all. The exchanges just wouldn't
quote except by request in particular series.
Another alternative would be the exchanges would
continue to auto quote in every series and would send those
quotes to the processor, but that's where they would stop.
The processor would warehouse them and wouldn't send them
I guess what you're talking about now is still a
further approach where the quotes would go down to the
vendor, and the vendor could warehouse them except by
request. Two points on that.
One is that wouldn't alleviate a vendor of the need
to be able to receive the full data stream from the
processor, and some vendors seem to want to be relieved of
The second is, and this is the area where Mike
expressed some difference the views between what I'd said and
what he was hearing from the vendors. Vendors are free today
to warehouse quotes. Once they take them they're not under
any obligation to include certain series, deep outs, away
from the markets and what they distribute to their end-users.
They can slice it, dice it, filter it any way they want to as
long as what they show on a consolidated way from every
market to trades to series.
They may not all understand that, and maybe we
should be doing a better job than we have in communicating
that to vendors, although I'm surprised that they don't
understand it, but that's the situation.
MR. SELIGMAN: Let me open it up for the rest of
the committee. Do they have questions for Mike Atkin?
MR. PUTNAM: We're talking about deep in the money
options here as well as -- in my opinion, the deep in the
money options is probably more useless information than an
out of the money option is because of a speculator. So deep
just as much as out?
MR. MEYER: Either side.
MR. QUICK: But if there's open interest in the
deep in the money, then it's relevant.
MR. PUTNAM: Then it's relevant because you've got
investors out there who have them. The deeper in the money
the more it just becomes a stock, so it doesn't matter.
MR. JOYCE: I think it's important to note that
it's -- Ed Joyce -- that the options series that no one has
an interest in is sometimes overstated, that phrase. There
is a subset of people that want that information, and that's
where it gets difficult, to just say we're not sending it
And then that relates to at what point in the chain
are you solving the capacity problem. If OPRA has to
calculate -- or the exchanges have to calculate the
information and send it to OPRA and OPRA has to send it to
the vendor, so that subset of customers that does want the
information and will pay for the information has it
available. What you've really done, you have not solved any
capacity concern through that alternative at any point in the
chain, until you get to the end, where you're sending less
data to the people that want less data.
You're not solving it at the exchange end. You're
not solving it at OPRA, and you're not solving it at the
vendor. You are solving it from the vendor to the customers,
if there's a subset of issues, which I'm sure there is a
large subset of customers that would be perfectly happy with
less data. It's just not everybody.
MR. SELIGMAN: Other questions?
MR. McNELIS: Brian McNelis from Reuters. I think
the last couple of comments were really instructive because
what we all seem to be agreeing is that, first of all, there
is a difference among customers as to what they would like to
receive. And second of all, we have the regulatory structure
which imposes a one size fits all rule on everyone in the
chain, and that seems to be a very great disparity as to what
It seems more reasonable to allow the flexibility
of the customer to decide what he wants to get and let that
solve the problem and go into a more free and open market
solution to the issue.
MR. SELIGMAN: Thank you Brian. Are there other
questions for Mike Atkin? Andy.
MR. BROOKS: Thanks Joel. Andy Brooks at T. Rowe.
I thought Ed Joyce's comment was really very interesting, and
I guess two things come to my mind. One is so many options
quotes are theoretical. People use them in a theoretical
way, and that subset of the investing crowd is always going
to want as much as you can give them, and they will not be
appeased or interested in getting less because of the
theoretical things that they do with these theoretical
quotes, because often things don't trade. I mean, they just
don't trade, but people look at relationships.
Secondly, I guess I wonder for those people that
have ever owned a way out of the money option or a way deep
in the money, less deep in the money but way out of the money
option, how do you value it if there's no quote and you get a
monthly statement from somebody?
MR. SELIGMAN: Let me, at this point, to, at the
risk of using my own cliche, to keep the train on the track,
as Brian if he could enrich our discussion with a
presentation on the technological issues.
MR. FAUGHNAN: Good morning. I'm Brian Faughnan,
And I'm Managing Director at SIAC responsible for planning
and development of the national market systems, and I just
have a couple of slides here to give you an overview of the
OPRA system just in relation to this discussion.
Just from a high level, OPRA is a dual-noded
configuration system where we have a node at each of our
sites, two sites of SIAC, one in Brooklyn, one in lower
Manhattan. The two nodes are connected and used in
production simultaneously and connected through a high-speed
The five exchange participants send their data half
into one node and half into the other node, and our system
accounts the data and sends it out based on symbol over the
eight IP multicast groups to the data recipients.
So, the data comes in like in the case of CTS and
CQS using TCP/IP, it's consolidated, stored, time stamps are
applied, records are written to a file, and the data is
disseminated out over the high-speed lines with a time stamp
using IP multicast similar to CTS and CQS.
Just from the capacity standpoint of the various
components, and a lot of this has been touched on already,
but just to go through them, basically, as you might expect,
from an OPRA perspective the number of CPUs required to
support the transaction rates are much greater, and those
CPUs are also of a higher power, higher level CPUs that are
used in OPRA.
The process or capacity again, as mentioned, 24,000
compared to the 1,000 and 1,500 for CT and CQ. Number of
participants, again, five and nine for CTA. TCP/IP inputs,
as would be expected, there would be more inputs for the OPRA
data coming in from the exchanges. There's currently eight
logical inputs from each of the five options exchanges.
Input capacity again was mentioned. This is from a
throttling perspective on the input side. We have a process
or capacity. We have throttling on the input side, and we
have pacing output side.
The IP multicast outputs we have eight, as
mentioned already, compared to the four and five for CTS and
CQS. The IP multicast capacity is based on the data
recipient connection. We were working on T-1s for CT, CQ and
OPRA for a while, and when we increased message for second
rate based on OPRA's projections that are given to SIAC, and
we're directed to upgrade our systems, we ask the data
recipient to come in with T-3s at that point, and the
capacity on the T-3 is in the level of 50,000 messages per
second, while still supporting CTS and CQS over those feeds.
Data recipients, at the latest count, approximately
50 for OPRA, 86 and 83 for CTS and CQS, and again, the
message per second peaks on a one-minute average basis, 70/18
for OPRA as compared to 226 and 509 for CTS and CQS.
He also have threads that run through the system
that support the number of messages per second that can be
handled over each of the OPRA eight high-speed lines.
There's a smaller thread, so there's two levels that have to
be determined when looking at capacity, not only the overall
system capacity, but what are the messages for second rates
that can be supported on any one of those eight output
threads based on breakout situations, or what have you.
And also, transaction files, needless to say, have
to be big enough to support 50,000 messages per second over
some extended period of time. So the transaction files and
disk space required are enormous.
Moving to the technological considerations, the
same considerations apply to OPRA as they do to CTS and CQS
with the following exceptions:
As far as sequencing of information, trades and
quotes are consolidated through OPRA as one system right now;
whereas, obviously, we have trades going at the CTS and
quotes going at the CQS for the equity side.
Other differences are the lack of databases and
calculations occurring in OPRA. At this point, OPRA
consolidates the data, logs the data and disseminates it out
over the high-speed lines, there are no databases or
calculations being performed on the data.
That carries over into the validation tolerances in
that there is minimum message validation other than verifying
that, yes, the category and types of the messages on the
input side are alphabetic as opposed to numeric, but there is
no price tolerance validation as there is no database to
compare them against.
From a capacity standpoint, it can't be emphasized
enough extremely high transactions rates that the system
needs to support going to 38,000 in September. The major
challenge there is not just, obviously, receiving a direction
from the OPRA committee to build a system to support 38,000
messages per second. It's the movement of all the components
of the industry to be in position to support that message
rate before it can be used.
I'll answer any questions if I can.
MR. SELIGMAN: Mike Atkin.
MR. ATKIN: Did I interpret that slide correctly
that the T-3 requirement is in place when you move to 50,000
messages per second? Right now you're currently doing T-1 in
requirements for the --
MR. FAUGHNAN: All of the OPRA data recipients are
on T-3s now. So the connection supports a bandwidth of
50,000 messages per second for OPRA while also supporting CTS
and CQS data.
MR. ATKIN: And then downstream from the vendor to
the firm would also then require a T-3?
MR. FAUGHNAN: If it was required to send 50,000 or
38,000 messages per second from the vendor to the user, you
will require a T-3.
MR. SELIGMAN: Let me pose a question simultaneous
with Brian and Mike Atkin. Brian made the point that the
capacity, in terms of messages per second, would be moving up
to 38,000 in September, but for that to be effective, you
have to have the vendors and end-users able to handle that
Do you have a sense as to when the vendors and end-
users are likely to be able to handle out of the 24,000 now
or the 38,000?
MR. ATKIN: They're all doing it now. They're all
investing heavily to meet that capacity. A couple of vendors
are putting it in the range of $15- and $18 million to get
there. So they're in the process of doing it.
MR. SELIGMAN: Other questions for Brian? Brian
MR. McNELIS: Brian McNelis, Reuters. Brian, if
the T-3s weren't available and it all had to go on T-1s, do
you know at 50,000 messages how many T-1s would be required?
MR. FAUGHNAN: There's approximately -- this is
testing my math skills here. Twenty-five T-1s are supported
by a T-3. So it's approximately 1.3 megabytes of data per
second can be sent down a T-1 line. On a T-3 line respect
it's in the 40 megabytes per second range.
MR. McNELIS: And what's the bandwidth requirement
of 50,000 messages?
MR. FAUGHNAN: I'm not sure off the top of my head,
but I believe it's 29 megabytes per second.
MR. McNELIS: So you would need somewhere in the
range of 20-some plus T-1s to deliver the data?
MR. FAUGHNAN: Yes. One of the issues with that is
you can't subscribe for a part of an IP multicast group over
a T-1. So it would be based on how you set up your network
and how you're actually handling the bandwidth.
In your network, all these T-1s look like one big
pipe for the data to go down, or, if you're treating them all
as individuals, then you could send one down one, another
down the other, but then you run out at eight. So it's more
of a matter of your network configuration, but yes, you would
need that kind of bandwidth.
MR. SELIGMAN: Do we have other questions for
MR. SELIGMAN: Okay. Brian, thank you very much.
MR. FAUGHNAN: You're very welcome.
MR. SELIGMAN: We appreciate the written
presentation as well as the oral. We've got a lot to cover.
Let us just take exactly -- I guess we said we would take a
15-minute break. But this time, for the first time, we
really mean it. When 11 o'clock arrives, I'll be starting
the meeting again. They haven't given me a gavel, but a
figurative gavel will come down, and we'll go, and we'll
cover, obviously, a lot of ground.
Let me, just by way of touching on one other aspect
of our process, at the end of our discussions today, besides
inviting the public for questions and comments I'll then talk
a few minutes about where we go from here. So until 11:00.
(A brief recess was taken.)
MR. SELIGMAN: Let me begin our discussion. There
are, in the agenda, essentially, four issues we wanted to
focus on. The first is the most general, and you may want to
anticipate as we go through this more precise questions that
It's framed in terms of transparency. I view it
really in somewhat more precise terms. The question with
respect to the options markets is a combination of
transparency and capacity, and it's capacity which means it
gets special treatment in our process and has received
special treatment from the SEC historically.
My instinct based upon comments that have been made
today and earlier is, in theory, the same kind of enthusiasm
that there existed for transparency in the equity markets
exist, but the question is to what extent does this general
presence have to be -- make allowances for the capacity
realities in the options market.
And it's in that sense I'd ask you to take a look
at the first question. The real issue, it seems to me, is at
the moment you have a system where vast volume of quote
traffic is circulated out. Is that system inevitable, or are
there recommendations this group would like to make to try to
reduce the amount of message traffic either going into OPRA
or going out?
And that framed, let me throw it open for
discussion. After maybe about 20, 30 minutes, I'll ask you
maybe individually to express views as we did on the equity
side. Should we have, in effect, pretty much the world we
have now in terms of options quote traffic, or is there a
better world that someone would like to propound as would be
appropriate for this group to recommend?
MR. JOYCE: This is Ed Joyce. I'll start out. My
view is that transparency is necessary and that if the
current world means continuous quoting and consolidated last
sales, adding onto the NBBO, which I agree and I think all
the exchanges agree with, I think that is the world that is
necessary to maintain the transparency.
It gets difficult when you start evaluating the
quote mitigation strategies. I think we should continue to
focus on quote mitigation, but I don't think the entire
structure should be changed.
The secondary I get concerned about when we focus
on primary market, I mean, there were many years that I would
have been very happy to have people just send out the primary
market, because CBOE was the primary market. But in options,
it's not as obvious.
It's a class-by-class issue, and to say that you'll
send out the primary market, I think it has a whole different
meanings in the options world, and therefore, I believe that
we have to continue generally with the current format, and we
can do better on mitigation.
MR. SELIGMAN: Ed, let me pose one follow-up for
you. Should there be less transparency for less actively
traded options or for out of the money options, however
that's ultimately define?
MR. JOYCE: I've been in many of the -- I put that
in the category of the quote mitigation discussions, and I've
been in many of those. And while I think we have to stay
with that, I get concerned when we talked about less
transparency. If it translates into not displaying a current
quote, I'm really not in support of it.
I have a difficult time envisioning the world where
an RFQ world works. I think you'd have to redo the entire
information processing system to live in that world. You may
as well not have those products, in my mind, because one of
two things are going to happen; either automatically people
are going to request for quote to keep the quote live, or
it's going to be invisible.
The option trading, in many ways, is driven by the
quote. The quote is what -- it was referred to as
theoretical, and I think you right on, but it's that
theoretical price that people are evaluating versus their
view of the value or their theoretical model that's
generating the trade.
So without a price you may as well not have those
products listed at all, as far as I'm concerned, and I think
you'll get resistance from firms and exchanges to just
MR. SELIGMAN: So from your view, the world you'd
be most intrigued to see -- or most pleased to see, I guess,
is a better way to put it, would be a world in a sense with a
similar universe of quotes we have now but an NBBO?
MR. JOYCE: Yes, a similar universe with a more
aggressive and continued focus on quote mitigation, but it
wouldn't be good to the degree where you'd just wipe out the
quotes. And it sounds like, given the earlier comments, that
there should be more involvement of the vendors in that
process, but generally I would agree with the way you
MR. D. JOHNSON: This is Dave Johnson. But what
about RFQ? Are you in favor of the RFQs?
MR. JOYCE: No, I'm not.
MR. SELIGMAN: Dave, what about you?
MR. D. JOHNSON: I am. I think it addresses the
capacity issue, and I believe Mike Atkin, in his survey, is
consistent with much of the Street, be it firms like ours is
that much of the information is not necessary at that moment.
I think it ultimately has to be necessary during
the day and after the day for pricing and settlement, and
what not, but during the day I think RFQs would a lot of
MR. SELIGMAN: How do you deal, Dave, with the
concern that Mike Meyer expressed to the effect that if you
had an RFQ there would be some vendors or end-users that
would just, basically, instantly request everything on an
MR. D. JOHNSON: I don't know who those people
would be, but again -- I would disagree with that. I don't
think it would be an -- an RFQ is not on an ongoing basis, so
I would disagree with that. I think that people would not
be -- again, with the parameters that we have, out of the
money, even in the money, open interest, that mitigates the
necessity for the RFQ.
MR. SELIGMAN: Okay. Jerry Putnam.
MR. PUTNAM: I hate to say this when we're talking
about lowering fees, but you could charge for the RFQ, and if
someone really wanted it, they could pay for it. It's kind
of like the allocation process or the short-term capacity fix
now by way of allocating quotes. You could charge for it.
MR. SELIGMAN: Let me go back to both Ed and Dave
for a second. In terms of quote mitigation strategies, are
there specific ones you have in mind? Ed, let's start with
MR. JOYCE: There's none that we haven't beaten to
death in the exchange meetings. I think probably the most
effective has been desensitizing the auto quote systems so
that they're not flickering, and that's done on an exchange
basis. That's done independently.
At CBOE, we have implemented a desensitizing
approach so that when have you a less active option that it
doesn't necessarily have to tick on every penny movement of
the stock. But I think that kind of thing and delisting
options series I think the exchanges have to be aggressive as
taking product on that isn't going to trade, whether it be
series within a class or inactive option classes.
I think we should be aggressive at taking product
on, but once we make the determination that the product is
going to be up there should be transparency and continuous
MR. SELIGMAN: And Dave, from your point of view,
are there specific mitigation strategies you have in mind?
MR. D. JOHNSON: Yes. I agree with Ed. There's
probably a list of at least five that all the exchanges have
addressed over and over again. The SRI study addressed it,
that's probably a year and a half ago now. Anything that the
exchanges have addressed I would be in favor of.
But in particular, as Ed said, aggressive listing
for competitive reasons, but I am also very much in favor of
aggressive delisting even if this multiple listing
environment. There are primary exchanges that trade primary
stock in a multiply-listed issue, and I believe that the
exchanges should be aggressive in delisting the issues that
are costly both to them and costly to the industry.
Once again, I'm in favor of the RFQ position.
Those are the two I think that we can address right away.
But again, it has been beaten through many a time and many
different studies and in dialogue between the exchanges. I
would like to endorse what the exchanges have done and
continue to work along those lines.
MR. SELIGMAN: Thank you. I think I saw Mike Simon
next, and then I'd like to pick up Charlie Rogers and maybe
Peter Quick, if I could.
MR. SIMON: We at the ISE totally support the
MR. D. JOHNSON: I can't really hear.
MR. SIMON: I'm sorry. Is this better? The more
the option is in the money the more it quotes and the less it
trades, so you have sort of an escalating inefficiency. In
the two or three years that we've been looking at quote
mitigation, the only quote mitigation strategy that gives you
any bang for a buck is the cabinet or the RFQ.
The delisting gives you a little bit, but as it
turns out the options that trade the least, the classes that
you would delist, also quote the least. So while you're
removing product and you're removing options for individuals
to trade, you're not doing very much on the quote side.
The only way we've seen any bang for the buck is
moving to an RFQ. For even the very active classes have very
inactive series. Even the AOLs and the Ciscos that are very
deep in the money don't trade but generate an enormous amount
The way that we've dealt with the issue on the
exchange side in our committee about preventing a simple
request for a quote from opening it up is saying that a
series would not open up for quoting until there has been a
trade, effectively looking at each series as an individual
opening for the day. So if something trades for its first
time at 2 o'clock in the afternoon, that's when it would be
begin quoting. And there's, obviously, a concern that for
that first trade there's a paucity of information, but since
most of the options pricing is theoretical people have
theoretical prices for that option, and it's not that much
different than beginning the trading and the beginning of the
quoting at 9:30 in the morning than at 2 o'clock.
So we think that's one way to address it, that
there would actually have to be a trade before an option
I just want to quickly respond to something Mike
Atkin said before about one way to address it is to, perhaps,
modify or repeal the Firm Quote Rule for all these series.
And I'd just point out that up until April 1st the Firm Quote
Rule didn't apply to options, and it's not the Firm Quote
Rule that has led to this generation of quotations.
What has led to the quotations is competitive
pressures. We at the ISE may prefer not to put out quotes
for the deep in the money, but we have no choice but to if
our competitors are. If our competitors have it there and
we're going out and marketing ourselves to order flow
providers, they may say, "well, once every two weeks me may
have an order on one of these deep in the money, and if you
didn't have a quote we're going to send it to the market that
does have a quote, and we're going to turn our switch on to
the market that we're going to send it to." And therefore,
we're competitively disadvantaged.
No exchange unilaterally can stop quoting or go to
an RFQ system. It has got to be done on a uniform basis, and
it has to be done under the leadership of the Commission,
because otherwise none of the exchanges is going to alone
take the initiative here.
MR. SELIGMAN: Before I get back to Joel, I wanted
to pick up the other two options exchanges. I think Charles
Rogers had his hand up.
MR. ROGERS: Thank you. Charlie Rogers from the
Philadelphia. I was actually going to raise two points.
Michael covered the first one quite eloquent. I did want to
circle back to what Ed Joyce said, one of the items he
brought up. And I will apologize in advance for the cliche,
but yes, we have beat a lot of dead horses here. One of the
things that Ed mentioned that I found very interesting was
the desensitizing of quotations.
Even if all the exchanges could get in a room and
discuss desensitizing quotations, it would lend itself to
uniformity across the board as to how much you would
desensitize them, and then they would never be in sync as to
who was going to make the first change.
What that lends itself to is the disparities in the
market, which may be only for a second, which leads to
electronic arbitrage, which really forces a lot of the
exchanges, a lot of our specialists -- DPMs, LMMs, and so
on -- to quote very, very quickly very often to make sure
that the markets are not out of line so you're going to get
picked off by electronic arbitrage.
MR. SELIGMAN: Appreciate that. Peter.
MR. QUICK: Former Chairman Levitt actually
convened the heads of exchanges back last fall to talk about
quote mitigation, and Paul Stevens from OCC was leading that
effort in terms of mastering those folks.
And the AMEX has been very interested in quote
mitigation. We actually had a board vote that would
eliminate out of the money, 4th expiration month options, but
that did not meet with approval from the rest of the industry
in terms of getting things that aren't really quoted out of
As far as cabinet trading goes, we're very much in
favor of that, in the quote per request in that respect for
out of the money, deep out of the money options.
For the National Best Bid or Offer, actually, the
options exchanges currently stand at four for it and four
against it without designators showing which exchange
actually has the best quote. And the reasons for that is
because it's not an order routing. It's really more of a
retail or public dissemination. Those people aren't making
the decisions on where to route the order.
MR. SELIGMAN: Peter, can I just interrupt for one
second? What you're saying is the options exchanges favor
the NBBO, but on the issue as to whether or not there would
be market identifiers there is a split?
MR. QUICK: 4 to 1 for eliminating.
MR. McNELIS: You said 4 to 4.
MR. QUICK: 4 to 1. I'm sorry.
MR. SELIGMAN: Okay. Now, when you say 4 to 1, it
is 4 in favor of market identifiers or 4 opposed to market
MR. QUICK: Four opposed to market identifiers.
MR. SELIGMAN: And the reason for the opposition,
as you understand it?
MR. QUICK: I would have to have that exchange
speak for themselves.
MR. MEYER: I could try and just, kind of,
objectively state those who are opposed to a market
identifier I think believe first, at Peter just said, that
for those who would use an NBBO service a market identifier
isn't critical because those are the customers who don't make
the order routing decision.
It's the broker that makes the order routing
decision, and he or she would see the full service that would
have market identifier. If there were a market identifier,
there's some risk that an exchange might want to be
identified as the NBBO and therefore could increase the size
by one contract to become the identified NBBO, which would
have a counter-mitigating effect. You'd have more quotes
than you otherwise would if that kind of game were played.
MR. SELIGMAN: As I understand this, though, excuse
me if I sound a little bit crude in this, that normally would
you viewed as aggressive competitive behavior, which we
normally like, but the reason for the hesitation is because
of capacity concerns?
MR. MEYER: The combination of a negative impact on
capacity, if there were that kind of aggressive competitive
behavior that we normally like, and the fact that this
wouldn't preclude -- indeed, the exchanges would be expected
to continue to aggressively compete in their quotes and would
be identified in terms of price and size in the full data
stream, which goes to those persons that are responsible for
making order routing decisions, and that's where the
competition is meaningful.
MR. SELIGMAN: Peter, I interrupted you. Sorry.
MR. QUICK: With regard to the cabinet trading, the
only downside to that is a lack of transparency for the
inactive series, and that would be a result that would be
negative for that. But we think the quote mitigation
benefits outweigh that fault.
MR. SELIGMAN: Let me turn to Joel Greenberg, and
then I'll come to Andy.
MR. GREENBERG: Thank you. Just for point of
clarification, Susquehanna, I guess, is the largest market
maker in the options world today, so obviously these issues
are important to us.
I want to touch on a few point, one that Charlie
just made in terms of the electronic arbitrages. That is a
large driver of the need for a very fast auto quote, and auto
quote is throwing out a tremendous amount of changes every
We have a couple of ideas about that. One is that
many of those people who are arbitraging actually are, I
would say, professionals of broker dealers masquerading as
customers. So when the order comes down to the exchange we
have to stand firm on our guarantees.
If the SEC were more aggressive in making those
become broker dealers and not requiring us to stand up to our
order flow quotes, as professionals, that would go a long way
towards mitigating some of the quote issues.
Secondly, a proposal that some of the exchanges,
particularly the CBOE, has suggested a variable raise so that
we can decide for which order flow providers we want to
increase our guarantees. So if a hundred lot comes down from
one firm, we can decide we may want to be a hundred up to
that firm; whereas, a firm that has a tremendous number of
professional customers we would only have to be ten up.
Again, anything that you could do to mitigate the
requirements of the specialist to be firm to professional
customers will decrease our need to throw out a tremendous
number of quotes so we're not continually getting picked off.
Second point I want to make, in terms of the NBBO,
until we can see that there's an effective linkage in place
we would be against an NBBO or an official NBBO, because what
happens, basically, we'd be obligated to an away market, and
we'd have no way of clearing that away market.
So I don't think that anything should be put into
place that would broadcast an official NBBO without an
effective linkage that's more than theoretical, that we
actually see as operating in practice, because, again, that
would cost the specialist community and market making
community a tremendous amount of money and ultimately the
public, because the quotes have to be widened out to take
into account the amount of money you'd be losing to the
The third point I would want to make, given the
quote issue we have, quote traffic issue we have, we would be
in favor of letting the vendors decide what they want to give
to which customers. I would cut it off at the point where
the information would be available, but if a Reuters only
wanted to send out the at the money quotes, let them decide
what they want to do.
I wouldn't make a requirement that every exchange's
quotes in every series would have to be broadcast to the
world. I know that's different than it is right now. I
think that given the amount of quote traffic -- we're not
optimistic that the quote traffic is going to be mitigated
any time soon -- I would let every vendor and let the
marketplace decide by customer which vendor they want to use.
MR. SELIGMAN: Appreciate that. I think, hi, Andy
MR. BROOKS: Thank you. Just a couple
observations, if I can. I think we absolutely have to have
an NBBO. Joel, to your point, it needs to have access, and
it needs to be linked. No doubt about that, it seems to me.
That's a premise of any fair and orderly market.
We also need to know who is generating these bids
and offer and the moniker of which exchange or which market
center is doing it I think is entirely appropriate, and
customers automatic to know who has got the best bid and
offer because it's not always clear to them that their
brokers are routing it to a place that might be better.
It's pretty hard to see that on a confirm. You've
got to turn to the back. It's in small print. I think it
ought to be right out there displayed.
And I think reported trades are important with this
NBBO. You want to be able to see what's traded at what
price. All that is part of a full display of trying to
understand what the current market is.
Certainly, it seems to me, that we ought to
discontinue options where there is no open interest and no
volume after a certain time frame. Reiterating a couple
points made earlier, I think the exchanges have been
incredibly aggressive about listing new series because that
means new business for them, and they've probably been very
lackadaisical about delisting anything.
To Mike's memo, I think he said 60 percent of the
traffic volume comes from zero open interest and zero volume
quotes, so it seems to me that would be a real easy way to
bring things down in a heartbeat, if I'm understanding it
And then I guess the other thing I would urge us to
think about as we think about the future, Joel and I were
talking during the break, you know, you wouldn't want to do
anything that would constrain innovation and improvements to
And in that vein, it seems to me that at some point
the options market might move more towards where the Nasdaq
market has come towards, and that is more towards an order-
driven market and less towards a quote-driven market and what
does that mean, because I think that has had tremendous
impact on the Nasdaq market.
MR. SELIGMAN: Bill and then Brian.
MR. HARTS: I think that when you start talking
about disseminating an NBBO without strong linkage you could
be asking for a lot of trouble. This is something that we've
learned in the equity markets over the last 15 years or so.
I specifically wanted to address something about
the exchange identifiers. Looking at the equity market, the
problem that, apparently, people are worried about hasn't
really happened. You don't typically see a regional exchange
increasing its size over the primary exchange, and there are
good reasons for that.
First of all, the routing decisions are generally
understood because of the linkage system that you will get,
at the very least, the NBBO regardless of which exchange you
send an equity order to, a cash equity order to. If he had
that type of linkage in the options world, I think it would
be, essentially, the same result.
The other thing is that if an exchange did try to
do that or a particular specialist or DPM did try to do the
that, they would also be at risk of having to honor those
quotes, and that could get very expensive very quickly.
MR. SELIGMAN: And then I think I had Brian.
MR. McNELIS: Speaking from the vendor viewpoint
and not understanding the intricacies of trading practices,
one of the things that we have looked at in terms of an NBBO
is to try to determine what its impact would be on traffic
And I know SIAC has not yet had a chance to make
that kind of study, and I don't know if anybody else has, but
we did some preliminary work where we found that at market
open the rate of quote change that would either set the NBBO,
change the NBBO could be as much as 80 percent of market
Now, the interesting impact of that is that if
you're talking about an NBBO where you also have to relate
the exchange identifier information and, of course, now size,
that the message for that quote is considerably larger than
the kinds of messages we have now for individual exchanges.
So the net result could be, and this would also
have to be investigated empirically once you got things
going, is that the actual bandwidth required to transmit an
NBBO only would be larger than sending the stream of quotes.
So interesting issue.
One further thought I had. I believe Mark Tellini
made some comments in May concerning equities, and I'm not
sure how much that would apply to options, but he was
commenting that an NBBO may be, in some ways, disinformation
to certain customers, that it relates, perhaps, the ability
to do a trade at small size but not carry the real cost when
the full size is then obtained at another marketplace because
the inside market only had a small size.
So I guess there is some sentiment among some of
the panel members that an NBBO is really not that beneficial
as far as customers are concerned.
MR. SELIGMAN: Let me at this time particularize
issues since we're trying to complete today's session by
1:00. If we can't, we won't. I'm going to frame some very
specific conclusions and ask you to speak relatively briskly
The first conclusion, based on the discussion
earlier today I take it no one on this committee would favor
now going to penny increments.
MR. D. JOHNSON: Agreed.
MR. SELIGMAN: And I guess maybe to frame this, and
with risk of a double negative, does anyone disagree with
that proposition? So we really do have unanimity? Nobody
wants any increments at this time. Okay.
MR. COLBY: Since I was baited by Mike, do you want
to formulate that just in terms about capacity, or is it a
larger decision about penny increments.
MR. SELIGMAN: I did not characterize it either
way, but I did use the magical three words "at this time."
And I think in terms of the conclusions that we would reach
in late August or early September. Do you want to make an
observation with respect to the distinction you've raised?
MR. COLBY: Well, if you analogize from the equity
markets and what the consequences have been with respect to
pennies, spreads have narrowed. Effective spreads have
narrowed, and order flow seems to be reduced. And to the
extent that those things have been criticized in the options
markets, thinking about whether pennies add value in that.
MR. SELIGMAN: Perhaps the report should reflect
that we have having this discussion at a time when there has
been considerable concern with respect to option capacity.
And obviously, it's not a conclusion that's to be binding
MR. SELIGMAN: Point two. Let's focus on the NBBO.
There are really three separate issues here, as I see them.
Number one, should we move to an NBBO for all options
exchanges? Number two, should that movement only occur when
there's effective linkages? And this is a point that I think
both Joel and Bill raised. And it's my understanding that at
least a more permanent form of linkage plan is anticipated to
be effective by next spring. And number three, if you adopt
or if we recommend an NBBO either before are when there are
effective linkages, should there be market identifiers?
I think those are the issues that have surfaced
through written submissions and discussions to this point.
I'd like to go around the room on this one. I think it's
very important for the purposes of our transcription that we
be really clear who is speaking, but let's start with Mike
Atkin and ask his views on those points.
MR. ATKIN: I would agree with all three
statements, and I would add to that size. I think we also
heard based on orders.
MR. SELIGMAN: Let me be real clear. You agree
there should be an NBBO. You would agree it should become
effective only when there are effective linkages or before?
MR. ATKIN: With effective linkages.
MR. SELIGMAN: With effective linkages, you would
want market identifiers; you'd want size. Okay. Rich
MR. BERNARD: My present inclination is to abstain
because there's a lot of complexity here that I haven't been
part of for a long time, but I would say that keeping in mind
that the reason for regulatory intervention has to be
protecting somebody who needs protection there is a place for
a Display Rule here, although I don't know it has to be an
SEC Display Rule, if the options exchanges can get to that
through a plan.
I'm a little concerned about the linkage
discussion. As you know, in the equities market, our view is
that you don't need to have those kind of linkages that we've
been traditional talking about, and what you're really
talking about is the ability of a specialist in one market or
a trader or an upstairs person to get to all the markets by
however they can, and that can be done through the market or
a routing mechanism. So with the caveat that there has to be
a way to get and not necessarily a hubs and spokes, then we'd
be fine with the idea that a linkage has got to be part of
this. And thirdly, I think you've got to end up with market
IDs to do this right.
MR. SELIGMAN: And how do you feel about Mike
Atkin's point about size?
MR. BERNARD: Yes, size as well.
MR. SELIGMAN: It's really four. Andy.
MR. BROOKS: I would say that we need an NBBO, and
we can only have it really when we have linkages and access.
I think we ought to have market identifiers. I think it
ought to include size, and I think it ought to include a time
and price priority to it as well.
MR. SELIGMAN: Okay.
MR. BROOKS: And so I'm adding a fifth, if I can.
MR. SELIGMAN: Phillip.
MR. DEFEO: I have to agree with the NBBO. I think
we should move toward an NBBO. I think it ought to include
size. I think there ought to be a way to get at the NBBO,
and linkage is that way.
I am of the opinion that we ought to have a market
identifier because I do believe it encourages competitive
quoting, and it gives direction to those who want to try to
get bids and offers.
MR. SELIGMAN: And how do you feel about time and
MR. DEFEO: Well, I've never had much of an opinion
MR. SELIGMAN: I think maybe giving deference to
the charge of the committee and what's realistic, let me
withdraw that question.
MR. DEFEO: Okay. Thank you.
MR. SELIGMAN: Some day you can tell me your
MR. DORSEY: Mike Dorsey, Knight Trading Group.
You might have to help me with all the questions, but I think
we would agree with an NBBO. In the equities markets, it's
of not much use, but it is of use for the new Rule 1-5, and
we would expect the options exchanges or the options trading
to be subject to that rule.
I don't know why it would be crucial to have
linkages but that's because we have access to all the markets
now. So it may not be so much our issue on that. Would love
to see size, yes. I think a quote is not just a function of
price. It's a function of both price and size, and size --
gotten the respect it deserves, and we're seeing that.
Market identifiers. I'm not so sure why it's
overly crucial to have an identifier now. If somebody could
tell me why, then maybe I'll join in that with a yes.
MR. SELIGMAN: So in essence, with respect to
identifiers, you, basically, don't have an opinion?
MR. DORSEY: We'll abstain from any opinion.
MR. SELIGMAN: Brian.
MR. McNELIS: In terms of some of the issues that
we'll be discussing perhaps a little bit later concerning
competing consolidateds, our view is that an NBBO puts
restraints on the ability of people to effectively make a
business of that. So we would actually be opposed to an
But if indeed there was an NBBO, we would certainly
want it to be calculated centrally by OPRA, or whoever the
plan group is. We'd love size and price priority.
MR. SELIGMAN: How do you feel about market
identifiers and size?
MR. McNELIS: I'd say if the market really feels
they need those things, that's fine with us, but they do add
to the size of the message, and if that is an issue, if part
of this is to address capacity, it's a consideration. I
really have no opinion on that.
MR. SELIGMAN: Thank you, Brian. Joel.
MR. GREENBERG: In terms of the NBBO, again, we'd
be in favor of that if there was effective linkage. I
disagree with Michael Dorsey from Knight that right now the
specialists and market makers don't have effective access to
the away markets because there's not effective linkage where
you could actually timely access a competing specialist
I would also add with that before there would be an
NBBO, again, just the way the systems work, I would want that
to be only if there were effective tools given to the
exchanges to deal with the vast numbers of professional
traders out there masquerading as customers.
In terms of market identifier, I really would need
to know more about the technological as you say regarding how
much capacity that would take up versus not having it out
MR. SELIGMAN: Just to follow up on a couple of
statements you made, Joel, in terms of linkage, one of the
earlier respondents said, in effect, you don't need it
because you've got access, which is somewhat like the
temporary or interim SEC approach. What's your view on that?
MR. GREENBERG: Are you talking about right now?
MR. SELIGMAN: Right now.
MR. GREENBERG: Right now you don't have access
because there's no way for a specialist on any of the options
exchanges to immediately or in a timely enough fashion to
access the away market. The systems don't allow you to get
there fast enough.
I can go into a long boring dialogue as to why that
is, but there really is no effective technology right now if
it were on any of the exchange or on all the exchanges for us
to quickly access an away market so we can give the report
back to the order flow provider that we actually were able to
clear the away market.
The time can be anywhere from five to ten minutes
to get a report back from a competing options exchange that
you want to clear the away market. That's mainly, for most
part, you have to go out and use brokers to clear the away
MR. SELIGMAN: Okay. Bill.
MR. HARTS: Bill Harts from Salomon Smith Barney.
Joel actually made a lot of the points I was going to, but
I'll just quickly reiterate them. Yes, there should be a
NBBO. We hoped that the Commission would mandate an NBBO
when they lifted or influenced the multiple listing process,
but that didn't happen.
At the very least, we think it will make things
simpler for our clients, and certainly from the standpoint of
best execution obligations we think it will help us. We
really do have to do it concurrently with a strong linkage
Just to amplify what Joel said, what makes a
linkage system like ITS work or not work is not the
technology -- and everyone has their opinions about ITS's
technology -- it's the rules. And the rules, for options
market linkage, are not really cast yet, and we don't know if
they're going to work.
And as Joel points out, there is this, sort of,
two-tiered system between professionals and non-professionals
and what they can access and how quickly they can access
between markets. I know we're, sort of, crossing this fine
line here between market data issues and market structure
issues, but this is one of those places where they really do
As far as market IDs, I think it's important
because it mitigates or it should mitigate some of the free-
riding that does come along with linkage, because when do you
have markets that are linked, as they are in the cash market,
there is some free-riding on quotes or markets between
I think that if an exchange, or DPM in this case,
with say, "Well, that's my quote. That's my market in size,"
I think he or she will be able to attract order flow because
of it. So I think the market IDs are important as part of
the NBBO. Size, obviously very important. Price is somewhat
irrelevant without size in an NBBO calculation.
MR. SELIGMAN: Thank, Bill. Simon.
MR. S. JOHNSON: Simon Johnson. I would support
the NBBO as previously discussed, including size. I think
what Bill said is exactly right. I think if you mandate the
NBBO, then that's going to get everybody very focused on what
exactly you need to make the linkages work. I suspect that
it is about rules and making the rules effective, but I think
if you see an NBBO coming, those who are in the market will
tell the SEC what they need and tell the markets what they
need. I think that will happen.
And I think there should be mark identifiers
because I don't understand the point -- I don't think there's
any general case to be made for making information available
without saying where this information is coming from, where
the prices are coming from. I think that tends to be
misleading and confusing, and I'm sure it can lead to various
problems such as free-riding.
MR. SELIGMAN: Ed.
MR. JOYCE: Ed Joyce. I am for an NBBO, and I like
the idea of tying it to linkage. I'd like to comment on the
issue of whether an exchange identifier should be included,
because the most obvious answer is of course it should.
And I guess you have to go back to the objective of
why you're going to an NBBO. If you're going to an NBBO as a
method of solving a capacity concern in market data, then you
should be careful to not structure the NBBO in such a way
that it doesn't address any of the capacity concerns.
I think if you're going to an NBBO as a market
structure issue, it's a different issue. The NBBO that was
addressed in OPRA and that came about to this 4-1 vote to not
have an identifier was focusing on an option information
And the reason I think it is a factor is in
addition to the possibility of just playing the games with
up-ticking the size that every time a size changes on any
exchange that's an additional message and a large message at
that. So that I just think that we should do some analysis
before we go to the quick and obvious answer of of course it
should have an identifier before we determine to build a
system that has more capacity concerns than the one we are
trying to sell.
So I would go without the identifier until I had
the analysis that showed me that it could solve our problem
with the identifier.
MR. SELIGMAN: Ed, what about size?
MR. JOYCE: I think size is important. I think
size is a good piece of information.
MR. SELIGMAN: Appreciate that. Rick.
MR. KETCHUM: Rick Ketchum. I first echo Rich
Bernard's point that while I can't restrain not saying
something I do think the committee should weigh market
participants and markets who are actively involved in the
market more than those of us who will have, at least, not
been regularly involved in it.
Within that context I see no difference or no
reason to take a different position than we've consistently
taken. There should be a National Best Bid and Offer for any
actively traded product. In reference to Ed's point, I don't
know how to think about an NBBO without thinking about it as
a manner to evaluate a quality of execution, so it should
have size, and it should have market identifiers.
I think there should be, with respect to folks more
knowledgeable than I, an evaluation whether there's efficient
access. It seems to me that tying that to a direct linkage
is maybe mistaken, and I think that probably the best way to
determine whether there's efficient access is to see whether
people are guaranteeing executions off the NBBO.
If they are, then that probably means it's
important and probably means that it ought to be out there.
If they're not guaranteeing it off the NBBO, then perhaps
there isn't efficient access.
MR. SELIGMAN: Thank you, Rick. Don.
MR. LANGEVOORT: I'm a complete newcomer to this
conversation, so perhaps my remarks should be preceded by
"for what it's worth." But with that in mind, my intuition
is very much the same as Rick's that an NBBO on market
structure basis makes a great deal of sense. A market
identifier makes a great deal of sense. Size indication
makes sense, and so I would go in that direction.
MR. SELIGMAN: Thanks, Don. Bernie.
MR. MADOFF: Bernie Madoff from Madoff Securities.
I would be in favor of all four of the point with special
emphasis on the issue that Bill Harts brought up that when
you discuss linkages it has to be an effect linkage that gets
you access, which is what Joel was, I think, alluding to.
A linkage unto itself would not be acceptable.
What kind of linkage, again, is not important as long as you
have access, which I think is what Rich Bernard was
As to the market identifiers, that's one of the
four things that I'm in favor of, but I would just like to
add that in the past -- and I'm not suggesting that this is
what the problem with the people that are objecting to it --
in the past, when we dealt with this issue in the equity
markets, the objection to the market identifier was,
basically, a competitive issue.
At that time, originally, and it was in some sort
of a change of opinion, the primary markets objected to the
fact that the regional exchanges and the Nasdaq marketplace
was getting what they deemed to be free advertising on the
issues. I don't know that that's a relevant issue. I don't
know that it's true.
But I'm saying when you address the identifier
issue you want to drill down into what are the real issues.
Is it capacity, as is being suggested, or is it a competitive
issue, and then make an educated determination.
MR. SELIGMAN: Thank you, Bernie. Gerry.
MR. PUTNAM: Move to an NBBO. I mean, I think
broker dealer best execution obligations makes an NBBO a
pretty convenient thing to have. As far as linkage, I'm on
the New York Stock Exchange side here. I think that linkage
is great, but I'd like to see it develop competitively.
And what I'm saying is that rather than having a
central authority provide the linkage, a requirement that
exchanges provided access to their marketplace, and then let
the linkages develop on their own but that an exchange could
not shut off a competing exchange from using a linkage but
that the linkage itself should develop on its own.
As far as a market identifier goes, I mean, a
market identifier is a great thing. If you're going to have
an NBBO and you want to route your order to the market with
the best price knowing what that market is with this linkage
I'm suggesting, that would be great to know where that
happens to be.
To one of Joel's points, and this sounds like I'm
criticizing something that you're concerned with, which is
being picked off by a professional that disguises themselves
as a retail customer, that's a great way for this linkage to
develop, meaning that if you're concerned about getting to
another marketplace and trading and it takes ten minutes to
get a response, you need an auto execution when you get
And I think in order to do that and not get picked
off you have to have a size display. So if the market is
good for one option, it's firm for one option to anybody
regardless of who it is. If you want to be good for 100,
you're firm to anybody for 100, and that size is what gets
you there, not rules of the exchange that says if someone
bids $1 for one lot that the market maker has to be good for
50 when they don't want to be.
MR. SELIGMAN: Thanks Gerry. Peter Quick.
MR. QUICK: Peter Quick, American Stock Exchange.
Yes, we'd be in favor of the NBBO being calculated by OPRA.
That's what was proposed by all the exchanges in March. We
would want this coincident with the linkage plan.
If you look about having timely access to away
markets, that would be most important and what Joel was
referring to because, for instance, the ITS system now I
think has a 30-second timeout, or it could be a minimum of a
30-second timeout on a commitment to away market and listed
AMEX and New York Stock Exchange listed securities. And when
Joel talks about a five-minute execution in the option world,
that would be completely unacceptable without the linkage.
As far as the ID goes, as Ed pointed out, the ID is
really due to quote mitigation. We've seen in the paper
recently about quote flickering, and that's exactly what
happens now with a lot of quotes with regard to options, and
that's simply because maybe somebody goes from bidding 97 to
98 to 99 size-wise, and that creates a lot of capacity
requirements for the system.
So that is the reason why we would not be in favor
of quote identifiers. That information would still be
available so that firms could evaluate their order routing
MR. SELIGMAN: What about size?
MR. QUICK: Yes.
MR. SELIGMAN: Charlie.
MR. ROGERS: Charlie Rogers, Philadelphia. Yes, we
are in favor of a centralized NBBO, and it should be tied
with the implementation of the linkage. Relative to the
other two questions on the table, market identifiers are an
interesting things. Peter touched upon it, and so did Ed.
It's clearly a structure versus a capacity point of view.
And if you look at the markets right now, what
generates a new message would either be you get a last sale
go out, you get a change in a quote, you get a change in a
size, and now you've just added another variable, which is a
change in an exchange probably associated with a size.
So you have the potential for increasing the stream
of messages that's going out right now, and those messages
are bigger. So at this point in time, we would not be in
favor of having an indicator on those messages going out.
With respect to size, we're in agreement that size
is very important. What makes for an interesting combination
is when you look at the combinations and permutations of an
exchange identifier, which exchange is there first and in
what size, you end up by saying, okay, if Exchange A is there
first and their size is a 20 lot and then your exchange comes
in next and makes it a 21 lot just on a size point of view
and the quote has not changed, does the 21 lot take priority
and therefore the exchange identifier changes, or does the
first exchange that was there with the original 20 setting
the market stay?
At some point in time, do you try to consolidate
those and, in effect, is it the 20 and the 21, so it's now
41? There's interesting combinations in there that you
really got to think through. Size is important, but you've
got to think through how you're going to represent that size.
MR. SELIGMAN: Appreciate that. Mike.
MR. D. JOHNSON: Joel, can I weigh in?
MR. SELIGMAN: Yes. This is David?
MR. D. JOHNSON: Yes, Dave Johnson from Morgan
Stanley. I think, number one, given our responsibilities as
firms for best execution, NBBO is a must. NBBO with size is
a must, and I'd like to also incorporate what you've done on
the equity markets with the Limit Order Display Rule, to
incorporate that with NBBO and size.
The linkage, I think it's long overdue. I think
linkage answers a lot of the questions not only in this
category but in others.
The identifiers, I think that simplifies things.
I'm not really sure -- and I'm listening to the capacity
issues that both Charlie and Ed and others have addressed,
and I've not addressed that myself. So I'm concerned, but at
first blush here I think it simplifies things utilizing NBBO.
But keeping in mind what's good for the customer and also our
responsibility of best ex, all these things are very positive
MR. SELIGMAN: Thank you, David.
MR. SELIGMAN: Let me turn now to Mike Simon.
MR. SIMON: At the ISE, we strongly support an
NBBO. We do not believe that the NBBO should wait until
there is a linkage, for many of the reasons that Rick Ketchum
There is access between the markets today. Is it
perfect access? Is it even great access? The answer is no.
Is it adequate to provide a meaning to an NBBO? We think
that is it.
And I think, to what Rick was saying, the real
proof is, do people abide, or attempt to abide, by the better
quotes in the markets, and the answer to that is absolutely.
Each market has its own variety of trade-through protection.
Today we all give best execution and trade-through reports to
our members. I think that there is adequate access to
support an NBBO as the markets currently exist.
And in addition, the SEC has adopted a trade-
through disclosure rule that would require members to give
notice when they trade through another market, based on
today's quote stream. Well, that is in abeyance. Until
there is a linkage it is not contingent on there being an
NBBO, so I think that our market structure today would
support an NBBO.
As to market identifiers, I sympathize. As the
smallest and newest market with what Bernie Madoff said, that
we'd love to be able to get our identifier out there, since
many times we are the best bid or best offer. But along with
my fellow exchanges, at least the majority of us, believe
that it would be counterproductive to our quote mitigation
efforts. And using Bob's qualifier regarding pennies, at
this time we would not support a market identifier until we
were comfortable that it would not exacerbate the capacity
As to size, absolutely. We believe that the NBBO
should be calculated just like it is in the equity world.
First, best price, then size, and then if two markets are the
same size, the first in time.
MR. SELIGMAN: And let me just observe that we're
very grateful that Mike Simon and some other representatives
from the options exchanges who were not members of this
committee could join us today, in terms of the report. We'll
have to recognize that you are not members. Cameron?
MR. SMITH: I'm Cameron Smith, I'm with Island,
rather than Datek, as the sign says. I'm sitting in for Ed
With respect to NBBO, I think that the question
really is whether or not -- we certainly support an NBBO and
believe that that's a very valuable tool for market
participants and investors.
The real question in our mind has been -- and I
know Ed has ably represented this view when he's been here --
is whether or not it should be required by regulation or, in
the case of OPRA, by contract. And we believe that it's
going to be there, and it doesn't need to be required. So I
don't know what column you put the check in.
With respect to linkages, we support proprietary
linkages, so we don't believe that there should be a linkage,
per se, but that there should be access, and that access
should be proprietary in nature, and that would include the
ability, of course, to charge a fee because you shouldn't be
able to access somebody else's market on better terms than a
member accesses that same market.
Finally, with respect to the acronyms and the size,
I hadn't really thought a lot about it, but it seems to me
you would need that information. And just from a policy
standpoint, I don't know that I would make my decision, one
way or another, merely based on the technology limitations of
today. I mean, as we all know, that's changing very quickly,
and to make an important policy decision based on where we
are with technology today.
MR. SELIGMAN: Thank you, Cameron. Mark, you were
out of the room when I explained this machine, which is
between the two of us. We've been trying to remove it, and I
apologize that we haven't had sight lines. But let me turn
to Mark at this point.
MR. TELLINI: I've been trying to talk all day, but
MR. TELLINI: So I am here representing Charles
Schwab and Company, and so I'm here representing probably the
largest group of retail options customers in the market. And
so I'm going to talk about customer experience for a second.
Today, in the options market, once you get beyond
size, it's often a black hole for a customer's order. They
don't know what price they're going to get, and they don't
know how long it's going to take.
And that's, in large part, a function of the
inadequacy of the market data they're presented, and
principally, size. They have no idea what size is actually
quoted in the market, they also don't know what size -- what
depth there is in the market, beyond inside size. We've
spoken before a lot about the importance of depth.
But anyway, it speaks to the importance of size, it
speaks to the importance of the ability of the market center
in which your order has arrived, the ability of the market
center to access another market center. So, obviously,
linkage is important to us, and linkage is irrelevant if the
quotes aren't firm on the receiving market centers.
In terms of market identifier, so market
identifier, again, highlights the absurdity of the current
system from the perspective of the retail customer. So,
retail customer is presented with a single quote. It's not a
stream-in quote, and so you tell the retail customer what the
price is, and more often than not, by the time their order is
entered and sent and received in the market, the price may
have changed, and the same goes for market identifiers.
So, what's the significant to the retail customer
of knowing that P-Coast or AMEX or CBOE was inside the moment
their order was entered, if they get a confirm back later
that suggests that their order was executed in a different
market at a different price.
You know, if they'd actually been able to see that,
that would -- to actually see those quotes change, that might
be a different story. And again, that speaks to the
importance of making market data products accessible to the
retail customer and affordable to the retail customer.
And on NBBO, we've spoken to this before, and we
obviously think NBBO is incredibly important to the retail
customer. We would offer it whether it was required or not.
But we don't think that, you know, as an options trader
myself, I actually see an NBBO when I trade. The market
makes it available, there are multiple vendors of NBBO in the
options market today, and there would continue to be
tomorrow, regardless of whether OPRA required an NBBO or not.
MR. SELIGMAN: Thank you, Mark, I appreciate that.
Let me -- Bill?
MR. HARTS: Thank you, Joel.
MR. SELIGMAN: A quickie?
MR. HARTS: A quickie. It just seems to me, going
back to this identifier thing, that if by adding capacity or
tweaking our "carrying capacity" we as an industry can
quadruple or quintuple the depth of the option markets, then
we owe it to our customers to do that.
MR. HARTS: Thank you.
MR. SELIGMAN: Appreciate that. And the entire SEC
did not come to a halt.
Let me paraphrase what I think I heard there, heard
in the last few minutes. There seems to be a large consensus
in favor of the NBBO, and I think it's reasonable to
anticipate that an effort will be made through OPRA to evolve
Second, there were, I think, a majority who favored
coordinating it with linkages and/or access -- and I think
Rick Ketchum's point was well taken -- but it seems to me
reasonably clear that that was of consequence to a majority
of this group.
It seems to me a large majority who favored size,
as well as the NBBO. With market identifiers, there was a
majority who favored it, but I think the report needs to very
carefully recognize that a majority of the options exchanges
themselves did not, as of this time, because of capacity
considerations, and I think that needs to be recognized as
Obviously, a draft of the report bearing upon these
issues will come to everyone, and we'll be able to capture
nuance and tweak the report, but that seems to be where we
are on this cluster of issues.
Let me focus our attention on the next cluster, if
you will, and I'm going to frame this one as quote mitigation
strategies. And let me see if I can frame a hypothesis and
see if the committee is comfortable with it.
Proposition one is a generally recognized sense
that it would be appropriate for the Commission to support
well-designed quote mitigation strategies.
Proposition two would be among the quote mitigation
strategies that were discussed with this group were, among
other things, the request for quotes concept, some relaxation
of the quote rule out of the money, more aggressive delisting
strategies, and I think there may have been others.
But proposition three, it would be premature for
this committee to weigh in favoring any of these quote
mitigation strategies before the option exchange's response
to the settlement of the SEC actions had been provided to the
That is to say, what we would really be --
concluding is that the committee recognizes there well may be
a need for quote mitigation strategies, but the appropriate
means by which these could evolve should occur only after the
options exchanges have had more chance to mature their views
on it, and there has been a dialogue back and forth with the
division of market regulation.
That's a complicated hypothesis, but I think it
captures one way to look at what we've heard and read through
Is everyone comfortable, or to put it this way,
again at the risk of double negatives, is anyone on the
committee uncomfortable with that framing with an approach to
MR. JOHNSON: Joel? Dave Johnson.
MR. SELIGMAN: Dave?
MR. JOHNSON: I think you should support quote
mitigation. Among the mitigation issues, RFQs and all that,
I think the exchanges have addressed it. I'm not sure where
they all stand, though, whether they're in agreement with all
of the issues that have been talked about for the last two
years. So, I'd like to get some clarification there.
Would it be premature for this committee to
recommend the types of mitigation? I think -- I assume that
everyone at the table has heard all of the issues, have heard
from the options committee, have heard from other industry
committees and forums that, you know, the issues are out
I don't know if this committee wants to recommend
it, but I sure would put it on the table to say yes, we
probably should, because we know all of the issues. Maybe
I'm ahead of the game, but I would like to see something come
MR. SELIGMAN: Dave, the --
MR. JOHNSON: Not being a member of the committee,
MR. SELIGMAN: Yes. The only way in which you may
be ahead of the game would be the following. The options
exchanges have delivered certain draft plans to the
Commission which are not public yet.
MR. JOHNSON: Yes.
MR. SELIGMAN: There is an ongoing dialogue with
the Commission which, among other things, is taking up quote
MR. JOHNSON: Yes, I'm aware.
MR. SELIGMAN: And what I am suggesting is it's
very difficult for this committee to have a view where most
experts, with respect to it, haven't reached a point of being
able to publish their view. I think the one point on which
this committee can reach a reasonable conclusion is that we
think quote mitigation strategies make sense, given the
enormous existing and potential capacity issues in the
But the ways and means, I think it's premature for
us to offer specific opinions on. I'm not sure of the
options exchanges, the division of market regulation has
really sorted it through to a final point, although I
understand that there's been a great deal of discussion.
Indeed, if I can restate in equine terms where the
discussion has been, it was earlier characterized as the
horse having left the barn, then we got to a point where the
horse had been beaten to death, then we were beating dead
horses. So it's clearly discussion on which -- and then we
were bringing the dead horse to water in wonderment that it
would not drink.
So I think there is no question that there has been
a lot of discussion, but I don't think it's reached a point
of finality, and I apologize for horsing around.
MR. SELIGMAN: I think we have Mike Simon.
MR. SIMON: I would just point out that the plans
that we -- that the exchanges have filed in response to the
SEC's anti-trust orders really only dealt with the
reformulation of OPRA and capacity planning, and did not
address quote mitigation. We've been addressing quote
mitigation two years before the order, and we're continuing
to address it.
As one of the exchanges who's been involved in
those discussions, we're actually starved for advice from the
industry. If we sit around the table, us five exchanges,
with the Commission there saying, "This is what we want to
do," it has -- there is no quote mitigation strategy that is
There will be a lack of transparency and a loss of
transparency in any mitigation strategy that we pursue. And
the question really is, how much pain and how much lack of
transparency is the industry willing to accept for quote
I've heard a lot around this table today about an
RFQ. That will have some lack of transparency for the series
that are subject to that. Whether it's an official
recommendation or just a consensus around the table, I think
it would really help our effort to get the users -- mainly
the users and to some extent the vendors -- to, you know,
voice their positions on this and I think it would move the
MR. SELIGMAN: Let me just add one other, I guess,
proposition, if you will, to my series of hypotheses, and
that is, there was a discussion earlier today about the
wisdom of the vendor and user community talking directly to
the options exchanges, among other things, on this type of
And while it may raise anti-trust concerns if it's
not done in an appropriate way, certainly a round table
discussion of that type might make some sense.
Going back to my hypotheses, is there anyone who
disagrees at this point, number one, that quote mitigation
strategies appear to be appropriate, number two, that we have
heard discussion of a series of them and we'll enumerate the
ones we heard today, number three, that it would be premature
for this committee, as of this time, to weigh in in favor of
any specific quote mitigation strategy, and number four, it
might be wise for the end users and vendors to talk to the
options exchanges as they evolve, so they'll have a sense of,
if you will, an industry-wide consensus.
Does anyone disagree with those propositions? Joel
MR. GREENBERG: I don't necessarily disagree, I'm
just confused. I thought that you said that there was some
type of proposal given to the SEC that they're reviewing
regarding quote litigation. And then what Michael just said
confused me, so I don't know what the status is.
MR. SELIGMAN: The settlement plans I
mischaracterized, and Michael's characterization was correct.
There has been separate discussion, which has taken place
over -- I think Michael characterized it as a two-year
And we are in a situation where I would anticipate
-- and again, the options exchange -- and OPRA, correct me if
I'm wrong -- but there is an anticipation that you will come
forward to the SEC within a reasonable period of time.
MR. GREENBERG: What's that period of time?
MR. SELIGMAN: Reasonable. Bill?
MR. HARTS: We think that the large variety of
products available from the options markets is part of the
reason for its success. And if, as part of quote mitigation,
you're going to start delisting ranges of products, that's
probably not something that would be good for the investor.
The other thing is, you know, we keep talking about
the capacity of the system, but last time I checked the cost
of capacity is coming down very quickly. I mean, I -- we
talked about T1s and T3s. At home, on my cable modem, I get
three or four megabytes per second these days for $29.99 a
month. So, is this really just a temporary problem that we
may be coming up with some Draconian solutions for?
MR. SELIGMAN: I don't think we're trying to come
up with solutions. At most, we're going to reflect a view
that the Commission should look sympathetically on proposals
from the options exchanges.
I do think it's worth recognizing that it's
possible that the approach commended with respect to the NBBO
may itself be a quote mitigation strategy of some
significance. Let's try Brian and then Bob.
MR. MCNELIS: Brian McNelis, from Reuters. I just
-- while I don't disagree that all of these quote mitigation
strategies are, you know, desirable things. I just wonder if
we're not taking the wrong approach, in that it seems to be -
- or, it seems to me that, if the exchanges have been talking
for over two years on these issues and can't resolve them,
there must be some sort of an intractable problem inherent in
And it seems that that problem is most likely that
they are trying to centrally decided, for a very diverse
audience, what a product should be, and create a single
output that makes everyone happy, and they're having a great
deal of difficulty doing that.
It seems to me it would -- the customers would be
much better served if the customers could tap into the
elements of that resource and get those parts of it that they
need. And then the exchanges are relieved of the burden of
trying to make everyone happy because they, in fact, have, as
just said, a great variety of products of interest to many
investors, but they're not all of interest to all investors.
So, a free market solution that allows distributors
of data to sell to buyers of data what they want, seems to be
a much more reasonable solution.
MR. SELIGMAN: I appreciate that. Bob?
MR. COLBY: I want to just make three factual
points, hopefully factual.
The first is that -- if I remember three -- the
first is that the only thing that I believe that there is --
and this is under dispute in arbitration -- the only
restriction on the data and how it's disseminated, that I
know of, is by a market of origin. There are no other
restrictions whatsoever on a vendor's ability to strip out
and drop and repackage the data for customers. Is that
The second is that, to some extent, we may be
talking about what gets fed down the pipe, and whether they
should -- some of the data should be split into different
pipes and enhance receipt capacity by vendors.
The third point is, I just want to re-emphasize,
that without knowing what is going to happen in an option
industry, there is a number of factors out there that
potentially could increase capacity beyond what we're seeing
today, real size, competing quotes within a market, new
markets, we've talked about pennies, but all of these, I
think, could -- quote volume up beyond what we're seeing
MR. SELIGMAN: I think I saw Andy and then Mark.
MR. BROOKS: Joel, I guess I'm going to support the
point, I think that Bill Harts made, and that is, you know,
it seems to me we're talking about a capacity concern, and
how long is that going to be with us?
And I just -- I don't know that, I'm ignorant of
how quickly things are changing. And if it's about capacity,
and the capacity limitations are potentially threatening all
markets, and we, for one, lose some flexibility with our
primary vendor when things get jammed up in the options arena
-- in fact, that part of our data feed gets turned off.
And if, in fact, it's potentially risking other
markets and other quote and delivery things, and it seems to
me we might have to be a little more forceful in bringing
people to the table, and mandating some percentage reduction
of quote traffic or volume or messages per second or
something if, as somebody pointed out, it's been a couple
years and people can't quite get things together.
MR. SELIGMAN: Appreciate that. Mark?
MR. TELLINI: It strikes me when you hear the
statistics that this is a classic problem of inefficient
allocation of resources and costs. So you have 70 percent of
the quotes are relevant to probably 99 percent of the users.
So why don't we force -- maybe to follow what Gerry
had said earlier -- why don't we make the users of that data
pay for the extra capacity? And if it's really worth it to
them, then they'll pay for it. And if it's not worth it to
them, then we'll all save a lot of money by not paying for
that extra capacity ourselves.
MR. SELIGMAN: I think it's important -- and this
is not only Mark's point, but Gerry and I think perhaps one
other raised it as well -- to reflect that that is a
potential quote mitigation strategy as well, that should be
All right, let me -- I'm sorry, Bernie?
MR. MADOFF: Yes. I mean, I'm not sure that this
is -- how relevant this is, but Andy Brooks mentioned earlier
that there was a concern about how do you price things if you
eliminate a certain series, and so on.
It seems to me that there are quotes that are
necessary for trading, and there are quotes that are
necessary for evaluation pricing. And it seems to me that
somebody should spend some time studying can this information
be stripped off, and not necessarily jam all of the
information down on a real-time basis when, for the most
part, you don't need it, other than for a very limited period
of time, or limited usage.
MR. SELIGMAN: Okay. Let me, I think, restate
where we are with my hypotheses. I think to generalize,
there appears to be the case that there is general belief
that quote mitigation strategies may be appropriate at least,
I guess, the way to put it, if capacity problems are
appearing to have operational significance.
Second, there is a general acceptance of the
proposition that it would be premature for this committee to
recognize any specific quote mitigation strategy, but we want
to reflect in the report the variety of strategies that were
discussed, recognize that the options exchanges and no doubt
the division of market regulation has been discussing this
for some time.
I think it's important, also, to recognize that the
topics are complex, and the fact that there hasn't been, to
date, a satisfactory solution, or at least a kind of
consensus proposal from the options exchanges should also be
part of this.
Finally, there was the comment made earlier today,
and I think a little bit of discussion on it, that there may
be value if and when quote mitigation strategies are going to
be pursued with the options exchanges talking to the vendor
and then user community.
And I guess, just to amplify that with Bernie's
last point, it is also, I think, very important that when one
does move to any specific quote mitigation strategy, that
there be a careful evaluation of the cost and benefits.
Where Bernie talks about quotes having different types of
value to different types of users, it's important to take
that into account and appreciate that for some theoretical
models, even if a quote is way out, it may still have real
MR. KETCHUM: I would not stand in the way of the
committee if they want to do that, and I would think I would
stay, because I guess I have two reactions.
One, a number of things said here make a great deal
of sense to me, what Mark said and Cameron, and to some
degree Mike and Gerry. I do think it makes a large amount of
sense to explore ways that the people, by perhaps providing
different levels of service, the people -- or, just a simple
request, the people pay for what they want when there is an
inordinate variation between the cost of generating its
But I don't personally know whether any of those
are feasible or not, in the options market. I think the
other concern is that there are things here you would list,
such as not having firm quotes once you send the information
out, that I think is just wrong, that I wouldn't personally
list, and I wouldn't really want to be associated with, which
is why I would abstain, if we're just going to do that.
And it strikes me that what we're doing in sort of
putting out -- it's kind of useless, and it seems like I
would rather either try to pursue a conclusion that a cost-
based approach, as articulated by Mark, made sense here, or I
would just not do anything and say, "We just don't know
enough," and that it should be left to the Commission and the
participants to deal with.
But I don't see much benefit in sort of saying, "It
would be nice if it makes sense and it's appropriate, and
there is capacity." But as I say, I won't stand in the way
if there is a view of the committee to have it, it just
doesn't strike me as useful.
MR. SELIGMAN: Appreciate that. Rich?
MR. BERNARD: Well, Rick basically anticipated the
same kind of thinking I'm having, particularly after
listening to Mark and other colleagues.
The idea of the options exchange is coming together
and trying to do mitigation strategies at the exchange level
is something that ought to frighten all of us. And I think
this is really an issue -- well, we've seen it, and I've got
the legal fees to prove it -- and I think this really is a
market type of a solution, that the capacity has to be built
at the exchange level -- and mind you, I say exchange level,
not at the OPRA level -- so that everything is out there for
the vendors to get, and then market solutions need to operate
in terms of how the vendors -- what the vendors do with that
enormous stream of data.
MR. SELIGMAN: Phillip?
MR. DEFEO: As an exchange, we don't want to
dictate to the market place what kind of data they ought to
use or not use; we find ourselves in the position of having
to calculate everything and some people want it, some people
I like the principle of since we calculate the
data, those who need more complex, more relevant data for
whatever means, should order paperwork. Those who don't
should not. We're going to calculate it, whether we
distribute or not depends upon who really needs it. So, I
think that is a market force-driven thing.
And although we all work to try to mitigate quotes,
the problem is whenever you start to have the discussion that
there is some entity, entities, or factions or customers who
want a different kind of thing. So we find ourselves always
being -- having to calculate all of the data and have it
available for those who may or may not want it, for whatever
And I agree with the other comments made about
pricing and so forth, as ways to drive the decision-making
process about using quotes.
MR. SELIGMAN: Ed?
MR. JOYCE: For clarification, I -- was I hearing
right on the recommendation that the economics should be
placed at the generation level, as opposed to at the
receiving level? But I want some clarification. That's what
I thought you meant.
MR. SELIGMAN: I don't think I characterized it one
way or another.
It seems to me this is going to be, at most, a
small part of a report. It may be that in the end product,
it is nothing more than we discuss this and reach no
conclusions, or alternatively, we discuss this and reach the
weak hypothesis I proposed.
I'm going to suggest that, in light of time -- and
we do have one more significant cluster of issues that I
think it's important for us to attend -- let's see how it
writes. I do expect you to weigh in on comments.
This is, I guess, at the end of the day, probably
one page in what will be a significantly longer report. And
we may be rewriting the -- if you will -- the introductory
sentence to be a non-conclusion, rather than -- we just
discussed this -- rather than the more tepid conclusion I
Let me focus you on one other big cluster of issues
and this is one which was framed in the equity side as the
single versus the consolidator model, but it has a second
significant aspect in the options side, and that is the issue
And I'm going to ask Annette to reprise a little
bit of what she said this morning, so everyone understands
the exclusivity issue, and then I'd like to get some views on
these two core issues.
MS. NAZARETH: Do you want me to say again what the
MR. SELIGMAN: Yes. In other words, just to --
we're now three-and-a-half hours into the day, and we want to
be sure everyone is focused.
MS. NAZARETH: Basically -- I'll repeat it for you
-- but basically what we said was that the -- each market was
required to send its data to OPRA, and that the markets were
not permitted to independently make their data available
outside of the OPRA system. That's, in a nutshell, what the
exclusivity provisions meant.
And what we said was that we have, in recent
history, made some exceptions to that, because of the
situation with the electronic markets, where obviously they
need, in order to trade on those market places, they needed
to make separate information that was not being fed through
OPRA available to their participants in order to trade in
that market, including, among other things, size.
And I think Mike Meyer related to the group that
this is yet another issue that is being discussed by the
exchanges, whether or not to change the exclusivity
MR. SELIGMAN: So to characterize where we now are
on these two issues, a consensus, a kind of majority of this
committee, favored a competing consolidator model for the
equity side. At the moment, on the options side, we have a
monolith. We have OPRA -- so far as I can tell, no options
exchange appears at this moment to contemplate or favor
withdrawal and competing with it.
Second, with respect to the equity side, we have,
at the moment, a recommendation evolving under which there
would be, in effect, a mandatory NBBO, and then other data
would not be subject to exclusivity and it would be more a
kind of a free market approach there.
In contrast, on the options side, you basically
have exclusivity for every options quote, less that report.
So it's a different kind of structure in those two senses.
Let me start, so that we'll all have a sense of it,
and ask the views of the representatives of the five options
exchanges. Do they favor the current OPRA system, or would
they favor a competing consolidator type of system? And
second, do they favor the current exclusivity approach? And
I'll start with Ed.
MR. TELLINI: Hey, Joel, can I ask a point of
MR. SELIGMAN: Sure.
MR. TELLINI: Because I was here last meeting, I
know some of the options exchanges weren't, and even I am not
at all clear on what a competing consolidator model means,
and after reading the draft, I'm even less clear. Could we
articulate, maybe for everyone here, a little bit about what
the common understanding of that would be?
MR. SELIGMAN: Well, the common understanding will
be what was ultimately in the draft, and we'll work through
the draft process to clarify that. And you know, I do look
forward to the comments from Schwab if there has been
confusion on it.
But just at a conceptual level, to put it in the
simplest terms, you currently have the CT, CQ plans, at least
one exchange has sought to withdraw from that and create a
different mechanism by which equity quotes could ultimately
funnel to vendors and others for consolidation.
MR. TELLINI: And who would price the data under
the competing consolidators model? Who would you negotiate
with for the data feed? Just --
MR. SELIGMAN: Mark, let me -- let's let that work
out through the draft.
MR. TELLINI: Okay.
MR. SELIGMAN: I'm wanting to stay focused here.
Let me suggest let's break down our two questions and treat
First, on the options side, does any one of the
five options exchanges at the table right now favor a
competing consolidator approach to the options? Mike is
MR. SIMON: Yes.
MR. SELIGMAN: Okay.
MR. SIMON: We would support maybe slightly
modified for the options side, and we have to go through all
of the ramifications, since we have not been a member of this
committee and involved in the drafting and the discussions.
But we think that removing mandatory consolidation
at a single level, allowing the greatest forces of
competition to work, makes as much sense in the options
market as it does in the equity market, and we would favor
exploring and trying to establish a competing model in the
options market as well. I don't see any reason why it would
be less successful in the options market than it would be in
the equity market.
In fact, because we have our capacity -- greater
capacity concerns in the options market, allowing free
markets and multiple consolidators to come up with different
ways to address that, it may actually provide better benefits
than having the five exchanges sitting around and trying to
figure that out in one monolithic approach.
So I think there are a lot of benefits to a
multiple consolidator, or competing consolidator approach
from the options side.
MR. SELIGMAN: Okay, I started with Ed. Ed, what's
MR. JOYCE: Given the complexity of the capacity
issues for the minimum data, the NBBO data, I believe a
single consolidator is the most efficient way to proceed.
Beyond that minimum data I would be open to competition in
the manner in which the data, enhanced data, is provided and
MR. SELIGMAN: Peter?
MR. QUICK: Even though the option markets weren't
really around in their form now back in 1975, certainly the
national market system -- we think that the present situation
with OPRA lends itself very well to providing quotes fairly
and evenly, you know, to all investors, institutional and
So, we would be in favor of that. We'd certainly
be open to look at any other model that came along, in terms
of a better mousetrap but without a little bit more meat on
the bones, it would be very difficult to embrace that right
MR. SELIGMAN: Charles?
MR. ROGERS: Consolidated information clearly is
the best, and we'd be more than willing to sit down and take
a look at any other mousetraps, so to speak, that may
actually be better.
Ed sort of touched upon it, clearly the basic
information should be there in a consolidated form. If there
is more elaborate, enhanced information that needs to go out,
then we would be more than willing to sit down and consider
MR. SELIGMAN: Phillip?
MR. DEFEO: I think, as the other exchanges said,
I'm in general favor of OPRA for the top level, or high level
information. I'm always interested in competing models, if
there were one to develop, and I would never say never.
I mean, situations change, technology improves, and
the like, and I think the industry itself should always
consider alternatives, although I think currently, with
everything we have to deal with, I would be in favor of
staying with OPRA for the top level information.
For other information, I think there is a variety
of providers that could be around, and any number of
individuals, vendors, exchanges might want to provide
different kinds of information. I'm in favor of that for
those folks, but generally on the top level stuff, I would
probably stay with OPRA at this point, although I wouldn't
restrict it from others.
MR. JOHNSON: Jim, can we define what other info?
What other information are you talking about?
MR. SELIGMAN: Well, let me -- that really goes to
the exclusivity issue.
MR. JOHNSON: Okay.
MR. SELIGMAN: And in effect, if we regarded the
NBBO and the sale reports as at least part, if not all, of
what is core, and anything else as non-core, it makes sense
in the equity market where a fair amount of the book would
not be considered core, with the options market, it's
trickier because in effect you've got such out-of-the-money
quotes up and down.
So, it is harder for me to particularize how you
would segregate the core from the non-core there, and I was
going to invite discussion once we'd gone through the
question of the single versus consolidated or competitive
consolidator issue that I framed first.
Let me see if I can then invite discussion from
others on the group. What I'm hearing is of the five options
exchanges, the moment for them seemed to be comfortable with
the OPRA system -- is intrigued, or interested in exploring a
competing consolidator model.
My inference from this -- and everyone jump in if
I've got this wrong -- is that probably this committee would
want to recommend that, for the moment, the OPRA system be
retained, that at the very least we see how well a competing
consolidator system works in the equity market if one is
approved by the Commission before visiting, whether or not a
competing consolidator mechanism of some sort would make
sense on the options side.
There seemed to be, however, fewer of the kind of
questions and concerns expressed on the options side that
prompted interest in equity competing consolidators. Anyone
disagree with that characterization? And I realize we're
moving pretty briskly at this point. Let's start with Rich.
MR. BERNARD: Joel, I would never disagree with the
notion that maybe you want to do this in steps, but I think
the conversation has recognized that you're going to have to
get all of these messages per second down to the vendor level
to do anything that is market-like in dealing with mitigation
And if you start with that premise, that means that
the idea that you're saving capacity by -- from the vendors
by holding it up in OPRA disappears. So if you take that
premise -- and I think it's an important premise, and we've
heard some thoughts about maybe capacity is an over-rated
concern in the long run, anyway -- then you think about what
First of all, the idea of forcing ISE into OPRA,
which is what happened, actually, as the price of admission
into the options industry should make us all shudder.
Secondly, the power in the options markets, maybe
more so than in the stock markets because the nature of
options and the derivative means that you don't end up with
the same kind of primary market phenomenon that you do in
stocks, and with five competing markets, I think the
competing consolidated market model in options would be very,
very powerful, and you'd get the kind of innovation at the
exchange level, and the interaction with vendors that you
might not see as readily in the stock markets.
So, for those reasons, certainly it would be New
York's view that there ought to be a very strong push toward
letting ISE withdraw from OPRA, if that's what it wants to
do, although I wouldn't object to an idea of one step at a
MR. SELIGMAN: Did I see Rick?
MR. KETCHUM: I think Rich said my points,
basically, very, very well. The nice thing about a competing
consolidator model, it doesn't in any way change the ability
for the markets involved to decide they don't want it. They
just all have to decide.
The question is whether you should reach a
conclusion, much less force it and generate the variety of
competitive issues that that forcing does, that all markets
have to be involved in a single competing consolidator.
And, you know, I don't think the analysis is any
more difficult or complex in the options market than it is in
the equity market, so I wouldn't -- I think you very
accurately characterized the views of the five options
exchanges and very well. I wouldn't vote for it.
MR. SELIGMAN: Gerry?
MR. PUTNAM: Yes, I don't think you should -- to
wait to allow a competing consolidator to develop, because I
think what we're saying is we're not -- the SEC wouldn't come
out and require somebody and point to someone and say, "Hey,
you go compete."
But if someone walks up and wants to compete, it
seems to me that if I was in the business of building a
system to disseminate quotes and sell that, that certainly
one of the most attractive places to try and do that would be
in the options market place, where there are lots and lots of
So, if someone wants to come and build a system --
you know, hats off to OPRA, 24,000 messages per second,
38,000 on the way, and then 50,000 right behind that. Way to
go. Maybe nobody is going to want to come in and try and
compete with that. But if someone does, I mean, I don't know
why we'd stop them from trying to.
MR. SELIGMAN: All right, Bill?
MR. HARTS: I'd like to ask a question. I'm not
sure of who, but in this competing consolidator model -- this
is actually something I'm not even quite comfortable with on
the cash side, either, but would be expect that the exchanges
would separate out the licensing fees from the cost of
providing the data? Because without that, no one would be
able to compete anyway, right?
In other words, if the exchanges provided -- gave
the same price to a competing consolidator as they gave to
OPRA, then the competing consolidator would be hard pressed
to sell the same data for more money.
MR. SELIGMAN: I think, again, that's the kind of
thing we will flesh out through the comment process on the
Let me just -- because I think it's time to go
around the table -- and the way it can be framed is the
following: How many of you would favor the same
recommendation for options, that there be a committee
statement to the effect: "We would favor permitting options
competing consolidators if the Commission division of market
regulation was satisfied, with respect to the enumerated
technology and competitive considerations in the report,
recognizing that the technological considerations may be more
complex in the options markets as of this time, or indeed, as
of all times, because of capacity."
How many of you would favor that? The alternative
is basically to say either, "I would never favor competing
consolidators in the options markets," or, "I would simply
not favor it at this time."
I'd ask you to be relatively terse in responding to
that, but let's start with Michael.
MR. ATKIN: It seems to me that there was some
systemic risk in the equities markets associated with going
to multiple consolidators and it seems to me that there will
be even more risk in going to it in the options market, so
that would be somewhat of a concern.
And I also am a little bit unclear about some of
the earlier comments that say we want a consolidated NBBO, a
centralized NBBO, and I'm not quite sure how that would work
in a multiple consolidator market.
MR. SELIGMAN: All right, and so to parse what
you're saying, are you basically saying that at the moment,
you wouldn't want the committee to recommend that the
Commission even consider competitive consolidators, or that
MR. ATKIN: Well, no, I have no problem with, you
know, examining it and looking at it, and I'm in favor of
competition, but I think that there are some extra risks
here, and I think it's important that the risks be
articulated in the report. I think it would be important
that the Commission consider them in reviewing any plan, and
we'll take pains, both on the equity side and in the options
side, if we go that route, to articulate those risks.
MR. SELIGMAN: Annette?
MS. NAZARETH: I'd just like to, I guess,
reiterate, I guess, what is your sentiment, Michael, that I
think we spent a lot of time when we talked about the equity
markets, talking about the technology challenges of a
consolidated model. And I think that here we're assuming
that either the Commission will consider those issues or take
them into account, which is a big assumption.
I think we haven't had the same kind of fulsome
discussion of what the differences would be, and whether the
challenges would be greater in options. And I'm not assuming
an outcome there, I'm just saying that I think the report
would have to reflect that, you know, that was a precondition
to really taking a lot of these views into account.
MR. SELIGMAN: And I think the report clearly will
MS. NAZARETH: Yes.
MR. SELIGMAN: Okay. Mike, I take it that you
would favor a competing consolidator model, but again, with
the assumption that the technological risk be systematically
taken into account.
MR. MEYER: Joel, I want to make just a brief
observation that -- before people comment too much -- that I
think the way you've set up the choice doesn't really reflect
the reality of what's going on in OPRA.
Because as least as I understand it, you're asking
people to express a preference between a competing
consolidator model, and the advantages to competition that
that would provide, as against retaining the monolithic
single consolidator, for various reasons, and losing some of
that competitive opportunity.
But I think what OPRA is working toward is
retaining a single consolidator for purposes of core data,
last sale in an NBBO, but relaxing its existing exclusivity
requirement to permit competition in enhanced forms of
service without regard -- outside of OPRA.
So, if that's what we're doing, then I don't think
it's fair to have people choose between those two extremes
without recognizing that that middle ground is very much on
MR. SELIGMAN: I think that middle ground, though,
is something we're a little familiar with because of the
discussion on equities.
MR. MEYER: Okay.
MR. SELIGMAN: And it really does resonate, it's
MR. MEYER: Good.
MR. SELIGMAN: And I don't mean to cut off
discussion, or to move us too briskly, but I think some of
the concepts that have been discussed in the equity side,
we're kind of assuming them.
MR. MEYER: Okay, well, I just wanted to make sure
that you didn't miss that point in options.
MR. SELIGMAN: Okay. And Mike, and then we'll get
back to --
MR. SIMON: Okay, I just want to make -- there are
a couple of factual differences, if I understand your
competing consolidator approach, there seem to be a couple of
lynch pins to that. One is that you have a vendor display
rule that applies. And the second is that you have the sort
of reporting rule that applies that, notwithstanding, if you
pull of a national market system plan, the vendors are still
required to give, from a Commission rule, non-discriminatory
data, and you've got to follow your own transaction reporting
Neither of those rules apply in the options market.
So I think if you were to move to a competing consolidator
model in options you've got to do one of two things; either
the Commission has to impose that overall discipline on how
the market data works, or you keep a stump of OPRA and let
the market participants come up with uniform rules that
govern them, and then you move to a competing consolidator.
But you don't have to -- as Annette said in the
very beginning, a lot of the national market system rules
just don't apply to options market data.
MR. SELIGMAN: I think that's right. Rich? I take
MR. BERNARD: You take it correctly.
MR. SELIGMAN: Okay. So you would weigh in in
favor of permission to form a competing consolidator, albeit
with recognition that both the regulatory and technology
competitive risks have to be worked through, or regulatory
MR. BROOKS: I would agree with that, and also just
comment that without it, I'm not sure how we challenge the
pricing mechanism that's ultimately delivering data to the
MR. SELIGMAN: Phillip?
MR. DEFEO: I support OPRA, but I would also look
for permission under certain circumstances, as previously
MR. SELIGMAN: Michael?
MR. DORSEY: We'd like to see the permission for
MR. SELIGMAN: Brian?
MR. MCNELIS: I think we're missing a part of the
essential discussion that happened in Don's subcommittee, and
that is that if you set up a situation where you say it's
open for competing consolidators, but you require those
consolidators to all go and buy data from all sources, you
disincentivize those people from doing that.
And so, it's not -- it doesn't make sense to offer
competing consolidators with an NBBO and with a vendor
display rule, that is just not economically sensible.
So, we would certainly favor competing
consolidators, but elimination of the NBBO -- well, this
doesn't exist for options currently, so we would not impose
those restrictions in the options market.
MR. SELIGMAN: Appreciate that Brian. Joel?
MR. GREENBERG: I agree, I think, with what Mark
said earlier, that I'm not sure how the competing
consolidator is going to work in the equity market. So until
that's clear to us, we'll abstain on deciding whether it
should be in the options market.
MR. SELIGMAN: Thank you. Bill?
MR. HARTS: More competition is better, so
competing consolidators is a good idea, but in conjunction
with an unbundling of the current fee structure.
MR. SELIGMAN: Simon?
PROF. JOHNSON: I would not support competing
consolidators at this time, I think we need to see what
happens in the equity market.
I agree with Brian, there is a contradiction
between an NBBO and vendor display types of rules in
competing consolidators. But my very strong inclination is
to go with the NBBO and the vendor display type of rules,
rather than -- and I think you're going to get very, very
little, if anything, from competing consolidators in the
equity markets. I think introducing it in the options market
is just going to seem irrelevant at best, and disruptive at
MR. SELIGMAN: Ed?
MR. JOYCE: I don't think we're giving sufficient -
- weighing in sufficiently, anyway, on the importance of the
complexity of the OPRA environment. I couldn't, without
quite a bit more analysis, support competing consolidators.
And I recognize Rich thinks we should shudder at
letting ISE -- requiring ISE join, but I was on the other end
of that shuddering about five or six times, where not only
were people allowed in, they were forced in. So I don't know
how we can change so much right on the fly.
MR. KETCHUM: I'm for competing consolidators with
the same regulatory recommendations that exist on the equity
side, I think covers Mike Simon's concerns.
MR. SELIGMAN: Don?
PROF. LANGEVOORT: I was very much on the fence
with respect to competing consolidators in equities. It
strikes me that the transitional problems that are going to
be present moving to competing consolidators in either
equities or options get compounded in the options area, given
the capacity concerns and all the other problems that are
My intuition is that maybe something of an
overload, and I would be hesitant to move, at least in the
near term, toward competing consolidators in the options
MR. SELIGMAN: Bernie?
MR. MADOFF: I would echo what Rick just said.
MR. SELIGMAN: I'm sorry, you would echo what?
MR. MADOFF: What Rick Ketchum --
MR. SELIGMAN: Ketchum, okay. Gerry?
MR. PUTNAM: Compete, no vendor display rule.
MR. SELIGMAN: Okay, let's see, we've got Peter?
MR. QUICK: Theoretically speaking, I think
competition is great. But I think because of the
practicalities that we have to deal with, that we would be in
favor, until there was more information on what this
competing consolidator would be like, that we would support
the single consolidator with OPRA which, in conjunction with
SIAC, has done a wonderful job in terms of doing their duty.
MR. SELIGMAN: Charles?
MR. ROGERS: The Philadelphia office would like to
wait and see what comes out on the equity side. It just
doesn't seem very practical on the options side right now.
MR. SELIGMAN: Michael?
MR. SIMON: Every July, I still shudder when we
have to make our next payment to OPRA as our entrance fee
into the organization, so I do support competing
consolidators, and I think that anything that needs to be
worked out on the options side could be worked out.
MR. SELIGMAN: Cameron?
MR. SMITH: I think without elimination of the
vendor display rule that the title even of competing
consolidators is a misnomer. It seems to me it's more going
from a monopoly to oligopoly. So I don't know where that
puts me. I think what Gerry said, "With competition, I'd
have competing consolidators," without the vendor display
MR. SELIGMAN: Mark?
MR. TELLINI: So again, I go back to I'm not quite
sure what a competing consolidator's model is. Until there
is more flesh on that, we'd be hard pressed to decide if we
were in favor of it or not. We will never go down as
opposing competition, but it seems to me without a display
rule, or without other significant safeguards, that it's not
competition, if only by name.
MR. SELIGMAN: Okay. So what I heard, in essence,
was there was a majority who favored a competing consolidator
model, but there were a lot of caveats articulated. One
level, there was a sense we need to see how it works in the
Another level is we'd like to see actual experience
in the equity market. A third caveat was it doesn't make
sense without an NBBO. We'll try to capture this in the
I do think it's important to recognize that within
the options exchanges themselves, four of the five, in
effect, were saying, "Not now." One, who, as Mike put it,
has to deal with its bills every July from OPRA, clearly
takes a different view, and that needs to be expressed in the
report as well.
I think Mark's point -- and a couple of others that
made it -- they want to see a fleshing out of what the
competing consolidator model will mean in the equity, and
we'll work on that in drafts of the report.
MR. JOHNSON: Joel, can I just weigh in?
MR. SELIGMAN: Please.
MR. JOHNSON: This is Dave, I'm sorry. We would be
in favor of the competing consolidator for -- based on what
you're saying right now, I agree with you. But just for the
record, we would be in favor of a competing consolidator.
MR. SELIGMAN: Let me ask those who favored a
competing consolidator mechanism -- actually, I will not.
MR. SELIGMAN: Let me go to a different issue, and
it's the last one I'm going to pose, and then I'll have a
residual conversation: exclusivity.
Let me go back to Mike Meyer. He said there is
some discussion as to how OPRA is attempting to reduce the
scope of what is exclusive, what information would be within
their concept of exclusivity, what would be outside. I think
it's good to put that on the table. Could you do so?
MR. MEYER: Sure. The current exclusivity
requirement, which I don't think is all that different from,
as a practical matter, what applies in equities, is that last
sale in quotes that the information the exchanges have must
be disseminated through OPRA, and may only be disseminated
through OPRA. The exception allows electronic facilities to
operate, because their own network is their market, and they
can't be limited to OPRA only.
The consideration would be to relax that further
and allow the exchanges and others, for that matter, to
provide value added dissemination of market data outside of
OPRA, for whatever economic arrangements they can negotiate,
so long as the recipients of that data receive NBBO and last
sale information provided by OPRA. That's the proposal.
MR. SELIGMAN: And I think that may be a good way
to get a hand on this one. Let me walk it around the room
and see how many would favor the proposal that, I take it, is
going to eliminate from OPRA.
And again, it would be the notion that the
exchanges would be able to sell their data to others than
OPRA, as long as the others included the NBBO and last sale
report, but they'd be able to customize their sales,
otherwise. Start with Mike?
MR. ATKIN: I support that.
MR. SELIGMAN: Rich?
MR. BERNARD: I'd like to hear from Mike Simon,
because I'm not sure I understand what's left after you put
the last sale and the NBBO out through the OPRA, what it is
that you're going to be able to accomplish under this
MR. SIMON: Rich, to put it in terms that you would
understand from the New York Stock Exchange, basically it
gives us the ability to run what would be the equivalent of
your customer dot with market data. We could put our
terminals in front of any end customer in the country the
data that we produce and that our members see.
And as long as they saw the ISE quote, whether it's
the full book or just the top of the book, as long as it had
an OPRA NBBO there so that they could see whether or not they
were trading through, they could see our entire market and
trade directly through a sponsored terminal. It's something
we strongly favor, and it is important to us.
MR. BERNARD: Then I guess, I would say that, so
long as this is not viewed as an alternative to the fully
competitive model of competing consolidators, I would be for
MR. SELIGMAN: Andy?
MR. BROOKS: I'll have to admit, Joel, I'm lost a
little bit on this one. The -- you don't have -- if you're
disseminating information to customers and it doesn't include
the NBBO, what are you disseminating? What are you giving?
MR. SIMON: It does include the NBBO. It would
have market-proprietary information plus the OPRA NBBO, so
that they would know where the best market was in making
their trading decisions.
MR. SELIGMAN: Excuse me for one second, let me go
MR. COLBY: I just want to see if I could clarify
this a little. This is actually moving the options markets
closer to the way the equity markets run now, because in the
equity markets, there is a consolidator, but there isn't
anything that stops a market from putting out its information
The display rule says any vendor or broker that
makes that available has to also include the NBBO, but there
is not an exclusivity requirement that I know of in the
equity side to date.
MR. BROOKS: Based on that, I'm in favor.
MR. SELIGMAN: Phillip?
MR. DEFEO: I'm in favor.
MR. SELIGMAN: Michael?
MR. DORSEY: We're certainly in favor of that, yes.
MR. SELIGMAN: Anyone opposed to it? Okay.
MR. SELIGMAN: I'm sorry, Brian, and I should have
known. Forgive me.
MR. MCNELIS: I'm in favor of saving Mike Simon a
lot of money. I would like to eliminate OPRA all together,
MR. SELIGMAN: Okay, Joel?
MR. GREENBERG: I'm in favor, but I'd also like the
term market participant to include specialist and DPMs, in
addition to exchanges.
MR. SELIGMAN: Okay. Everyone else in favor? No?
Okay, Reuters? So we've got Cameron, Mark? That is, you are
not in favor?
MR. TELLINI: We are not in favor of an exclusivity
MR. SELIGMAN: No, I understand that. This was --
MR. TELLINI: No, but towards --
MR. SELIGMAN: In any --
MR. TELLINI: Exactly.
MR. SELIGMAN: Okay, all right --
MR. TELLINI: Actually --
MR. SELIGMAN: Sorry?
MR. TELLINI: -- I should make a point here. And
clarify for me if I'm right or not, but Island's book is on
the web today, distributed. And to the extent that Island
were to start quoting options and -- that would be illegal
under -- that would be prohibited under this proposal.
So, information would be denied, helpful, useful
information that's available free would be inaccessible to
MR. SMITH: It would be prohibited because it would
be cost-prohibitive to also include the NBBO.
MR. PUTNAM: Right. It's a vendor display rule, is
what -- I mean, this sounds to me this is a vendor display
rule. So if someone -- and you might have a rule that says
you can't falsely disseminate information, or disseminate
information to a public customer, imply it's the NBBO, and
have it not be.
But if someone -- which we heard earlier, 70
percent of the information is useless -- if someone says, "I
just want to buy 30 percent of the information, and I don't
care about the useless part," if this precludes them from
doing that, then I'm against a requirement to disseminate the
NBBO and last sale information with any value enhanced data.
MR. SELIGMAN: All right, let me be real clear.
That is, more or less, what we're talking about. That is,
there would be the requirement of the NBBO and last sale, and
then there would be free play with respect to enhancements
coming from individual exchanges.
And what you're basically saying is you don't like
that, because you don't like the NBBO.
MR. PUTNAM: Yes, there's just no chance to develop
any competition in the market place if you make everybody
have to go back to that consolidator, that single
consolidator, get a piece of information, pay for it before
they can differentiate themselves.
And I think it's Mark's point with the Island, and
us also, that we provide free information on the web. And if
we had to publish an NBBO requiring us to buy it before we
could give that information, then that would make it very
expensive to do.
The disclosure requirement needs to be there, you
can't fake it that it's the NBBO, but as long as the
disclosure is there, I don't know why people shouldn't be
allowed to buy what they want.
MR. SELIGMAN: Okay. I know we're going to have
late lunches today. But just for the comprehensiveness of
the record, we went through Michael, we picked up Ryan's
point of view.
Again, the question is, with respect to what is an
OPRA proposal for non-exclusivity of data beyond the NBBO and
last sale report, let's go through Joel, go around the table.
MR. GREENBERG: Just to clarify, we would be in
favor if you can put out information that's not -- that does
not have to include the NBBO, option information would be the
depth of the book that does not necessarily have to have the
NBBO included, but as Gerry said, there would be a
disclaimer, "This has nothing to do with the NBBO, this is
the depth of the book."
But we'd also want it to be that it's not just an
exchange, it has the right to do that through the DPM
specialist or any other broker-dealer would have that
MR. SELIGMAN: Okay. Bill?
MR. HARTS: I think the only way that you would
want to force someone to carry the NBBO is if they could get
the NBBO for free, otherwise, Gerry's point, you'd
essentially be eliminating competition.
MR. SELIGMAN: Yes, we sort of had the discussion
on the NBBO earlier, and I guess maybe to frame it very clear
-- what's happening is people get tired -- is there was a
consensus in favor of the NBBO, we had discussion as to
timing it with linkages or access, size, market identifiers.
The question is, above and beyond last sale reports
and NBBO, should there be exclusivity through OPRA? And OPRA
has taken the position that they're going to propose that
there not be, that additional data be allowed to be
And that's where, I think, up through Michael there
was concord with it. Brian is not, because basically, for
the reasons he stated. And that's the question to be posed
MR. HARTS: But -- well, no, but I thought that the
OPRA proposal included that you had to carry the NBBO.
MR. SELIGMAN: That is correct.
PARTICIPANT: And that's how we understood it, too.
MR. HARTS: We would not be in favor of that. We
would be in favor of non-exclusivity for the first part of
MR. SELIGMAN: Okay.
PARTICIPANT: Yes, let me amend mine, too, because
-- along with what Bill says.
MR. ATKIN: Joel, just to clarify, we are not
recommending a display rule for options. We are -- is that
MR. SELIGMAN: I thought that's what we talked
about earlier today, when we discussed the NBBO --
MR. ATKIN: Right.
MR. SELIGMAN: -- and the notion would be we'd
presumably be -- I'm sorry -- adopted through the OPRA plan,
rather than through the Commission, but that's an option as
MR. ATKIN: That is a display rule, if it's --
MR. SELIGMAN: Yes. No, I --
MR. ATKIN: If it's a contractual display rule,
it's a display rule.
MR. SELIGMAN: Yes.
MR. ATKIN: So those are different questions, I
MR. SELIGMAN: What are different questions?
MR. ATKIN: Well, I think everybody supported an
MR. SELIGMAN: Right.
MR. ATKIN: So, essentially NBBO -- it's not
necessarily the same thing as a vendor display rule.
MR. SELIGMAN: All right. Fair point, but I guess
what we're really framing now is, above and beyond the NBBO
and last sale reports, should additional data exclusively
flow through OPRA, or should exchanges be able to customize
MR. GREENBERG: Joel, can I ask a question, because
I'm confused. If the CBOE wants to just show the depth of
the book, and sell that to someone without -- and Reuters is
going to buy it from them, would Reuters also have to show
the NBBO at the same time?
MR. SELIGMAN: That is the OPRA proposal.
MR. GREENBERG: I think most people on this side
were saying they can just show the depth of the book, without
having to show the NBBO.
MR. SELIGMAN: That is certainly Reuters'
MR. GREENBERG: That -- okay.
MR. BROOKS: I don't think that's what I'm saying.
I think if you're in the -- if you're disseminating
information about options, you have to include the NBBO.
Otherwise, what have you got? You've got confusion.
Now, Mark, I'm sensitive to your point, you know, I
don't want to restrict people, be gee whiz, somewhere you
have to have a point of departure, and that is the NBBO.
What's the market?
I don't care who pays for it, how much they pay for
it, you've got to have that. Everybody who quotes it has got
to get that.
MR. TELLINI: The NBBO is available someplace,
right? So, all you're expecting customers to do is put two
and two together. You tell them, "This isn't NBBO, it's
valuable, additional information. If you want NBBO, go get
it someplace else."
PARTICIPANT: Yes, I think our point is not, you
know, whether or not a customer wants and desires and will
buy from us an NBBO, it's whether or not we're forced by some
regulation to give it to some customer who doesn't want it.
That's the whole point.
MR. SELIGMAN: I think we all understand the terms.
Let's go around the room. Bob, do --
MR. COLBY: I'm not clear exactly what the OPRA
proposal is, but there may be a difference between some forms
of additional information and others, because it may be a
difference to give the depth of book than it is to give just
one market quote.
So, and certainly in the equity world, those are
two different things. If you give just one market quote, you
have to give them all. If you give depth of book, that's a
different question. And so --
MR. TELLINI: What if you give one market's depth
MR. COLBY: I mean, the question then comes, so --
PARTICIPANT: So, do you have to give the NBBO --
MR. COLBY: Yes. I mean, if it's one market's
depth of book and it's their BBO, then yes.
MR. TELLINI: So it's okay if you strip out the BBO
and just give the rest of the book, sort of --
MR. COLBY: There are lots of different forms of
market product which may not be giving out the quote that are
additional market data that the display rule doesn't apply
I take your point, this would be a little silly in
the Island context, but there are lots of other contexts
where you could have other information, size, for instance.
You could have other information that may not necessarily be
depth of book, but -- or be quotes.
Sorry to complicate it, Joel, but --
MR. SELIGMAN: Let me put it in terms similar to
where we were with equities.
There was a consensus in favor of an NBBO, and
there was a notion that other information could be sold.
Perhaps that's what we're talking about on the options side.
MR. ATKIN: I'm sorry, Joel, just real quick. I
thought there was a consensus that we wanted an NBBO with
MR. SELIGMAN: I'm using a shorthand.
MR. ATKIN: Okay.
MR. SELIGMAN: Yes, yes. That was what we talked
MR. ATKIN: Bob said that that would be additional
data that could be pulled separately.
MR. SELIGMAN: And I guess the question we're
struggling with at this point, and I think it could be a bit
because of fatigue, is where we come out, in other words,
with respect to exclusivity on OPRA.
The way the OPRA proposal is framed, is they're
going to propose that there has to be dissemination of the
NBBO and last sale reports, and anything else can be
customized. That's the question I've posed to the group, and
we seemed to be rolling along okay, and then we hit a snag.
MR. JOYCE: Joel, can you compare it to the --
currently, all market data has to go through OPRA.
MR. SELIGMAN: Right.
MR. JOYCE: And the OPRA proposal is that beyond
the NBBO and the last sale, any other information that you
want to sell to anyone does not have to go through OPRA, you
can do it -- you can contract directly for that information
and compete for that information.
MR. SELIGMAN: And that's exactly the world we've
more or less reached in terms of our recommendations with
respect to equity. So the question is, do we want the same
world for options as for equities? Brian?
MR. MCNELIS: Joel, I just want to not forget -- I
mean, Joel Greenberg is sitting here with lots of valuable
data, and he should also have that privilege. Why should it
be restricted to OPRA or the exchanges? I mean, there are
lots of people that have good, valuable data, and there needs
to be an outlet for that and the freedom to buy and sell that
MR. SELIGMAN: Okay, I've heard Joel's point.
Simon, what's your -- I'm sorry, Bill, you've weighed in on
MR. HARTS: I think we're sort of on the same page
with Mark Tellini, from Schwab, that there should be no
exclusivity for data, really, of any kind, because if any
market participant wants to sell that separately, he should
be able to.
If ISE wants to display their markets without
anyone else's markets, that should be their prerogative. And
if Andy Brooks wants to see the NBBO, then he can buy that
from Reuters and see it on another --
MR. SELIGMAN: Okay. Simon?
MR. SMITH: You know -- excuse me -- maybe if we
had three choices, it would be easier. One choice would be
the OPRA proposal doesn't go far enough, the other one is
it's dead on, and the other one is that's -- we don't need
MR. SELIGMAN: You can articulate each of those
views in response. I mean --
MR. SMITH: But it's sort of misleading the vote
for one of the two choices, because if you vote -- either way
you vote, it's kind of misleading if you don't think it's
MR. SELIGMAN: You can express that, is what I'm
saying. Not going to preclude that. Simon?
PROF. JOHNSON: I think what OPRA is proposing is
dead on, I think that it's essential to have a required,
mandatory NBBO, a vendor display-type rule.
But I think beyond that, the ideas they are
suggesting seem very sensible and very much in line with what
we suggest for equities.
MR. SELIGMAN: Ed?
MR. JOYCE: I agree with that, Simon.
MR. SELIGMAN: Rick?
MR. KETCHUM: Support the OPRA proposal.
MR. SELIGMAN: Don?
PROF. LANGEVOORT: I'll support it.
MR. SELIGMAN: Dave?
MR. PUTNAM: If I could just give a quick example,
just to -- if I wanted to provide my depth of market in my
book, and I wanted to do it for $1 a month, and you wanted to
buy it for $1 a month, and I was required at that point, if I
wanted to do that, to go to OPRA and pay $7 a month for the
NBBO, I know have to charge $8 to get to where I wanted to
be, and all you really wanted was my book. And I can't sell
it to you for $1, because I've got to pay them $7 to get the
NBBO, and now it's $8. Who on Earth benefits from that, if
all you really wanted was my book, and you understood what it
meant? So, I'm against --
MR. JOHNSON: This is Dave. That's my concern,
MR. SELIGMAN: Okay --
MR. JOHNSON: It's eliminating the competition that
we talked before. I know the NBBO is important, but you
know, we can provide that. Someone else may be able to
MR. SELIGMAN: Okay. Peter?
MR. QUICK: We support the OPRA proposal.
MR. SELIGMAN: Charlie?
MR. ROGERS: Philadelphia supports the OPRA
MR. SELIGMAN: Michael?
MR. SIMON: If anybody can remember back to what
Rich Bernard said at the beginning of this discussion, that's
what we support. We would support the OPRA proposal on the
understanding that it is not the end game, but it is
certainly an improvement over what we currently have.
MR. SELIGMAN: Cameron?
MR. SMITH: So, we don't support it, because it
doesn't go nearly far enough.
MR. SELIGMAN: Okay. Mark?
MR. TELLINI: We can't believe that customers would
be denied data just because you would force them to -- you
would force the distributors of that data to buy the inside
quote and display that along with it. So you'd take the
Island book off, you'd scuttle New York's plans to put their
book on the web, Redi and Arca have their books up on the
web, those books would have to come off.
So, I mean, this is a conversation in the options
context, but it at least is germaine in the equities context.
MR. SELIGMAN: Phillip?
MR. DEFEO: Just a clarification. I support OPRA,
but if someone else wants to show depth of book, and they
don't want to show the NBBO, I don't think there should be a
requirement, necessarily, to show that NBBO. If there is an
NBBO to be shown, then it should be calculated by somebody.
And if there is somebody else who can do it better,
cheaper, and they can meet all the requirements that are put
on them, then that competition ought to go on, over time.
But, you know, we don't want to restrict. We want to have a
sensible environment that's regulated that has confidence,
but won't restrict anybody. The data is the data.
MR. PUTNAM: There is a huge demand for it. Every
broker-dealer in the country, and a lot of customers --
right, most of them -- want the NBBO data, so they're going
to be willing to pay for it. So there is demand for that
consolidated data. So it's going to exist.
It exists today, as Mark pointed out. There is
demand for it, so it's absolutely going to exist, but you
should differentiate it from value-added or enhanced data
from tying the two things together.
MR. SELIGMAN: Mark, you had another point?
MR. TELLINI: With deference to the chairman, could
we just take a show of hands on people who agree with -- I
think Phil was the last person who articulated it, or Gerry.
I mean, could we just take a show of hands of people who
agree with that, versus disagree?
MR. SELIGMAN: Agree with what, precisely?
MR. TELLINI: With the idea that to the extent that
a vendor -- I'm going to use these, I know these are terms of
art -- but if someone wants to distribute market data that
does not include the NBBO, includes, for example the Island
depth of book, the New York depth of book, the ISE depth of
book, that they should be allowed to do that without being
required to also purchase the NBBO and distribute that --
MR. SELIGMAN: I thought we had -- I'm sorry, what?
PARTICIPANT: Is that what we're voting on? Is
that what you're asking for a show of hands on?
MR. SELIGMAN: I thought we had the discussion
earlier today as to how many would favor an NBBO, and we went
through discussion then, focusing on such issues as with
size, market identifiers. We had more people in the room
when we had that discussion, and I think we've weighed in on
MR. GREENBERG: Joel, I think -- I thought that
that was deciding whether OPRA should be calculating an NBBO,
not that it would have to be necessarily -- would be a vendor
MR. DEFEO: We're not talking about -- yes, they're
separate questions. What we voted on earlier is a different
issue than this one. This one talks about the independence
of data provision, and can someone who has individual data,
collective data, depth of market, or whatever else, present
that and not have to present specific OPRA data.
MR. SELIGMAN: All right. So, in other words, the
notion is how many would favor OPRA calculating an NBBO,
based upon all of the options exchanges but no vendor display
MR. PUTNAM: The reason why is because everybody in
the room, everybody in the country, wants to know what the
NBBO is. So when you say, "Are you in favor of the NBBO,"
The natural response is, "Yes, of course. I'd like to see
what the best bid and offer is." But that is completely
different than requiring a vendor to carry it.
MR. MEYER: Remember that the OPRA proposal does
not require that the vendor carry the NBBO. If a vendor
wants to provide only the enhanced data and not the NBBO, the
vendor can do it, but he could only provide it to someone
who, somewhere or another, got the OPRA NBBO.
MR. SELIGMAN: All right, let me -- I'll take Mark
up on this question. And --
MR. JOHNSON: So, Mike, you said that OPRA was only
MR. MEYER: OPRA would calculate it and make it
available, and any service could only be provided outside of
OPRA to an end user who also received, from some source, the
OPRA-calculated NBBO and last sale.
MR. PUTNAM: And how would you know that? I mean,
if somebody comes to our website and looks at our book, how
do we know that we're going to consolidate it? We have
people, I think, that just look at our book. They don't care
about anything else, because they've got his for free,
they've got --
MR. MEYER: I don't think we've gotten to the point
of figuring out how we would --
MR. SELIGMAN: Bob, you wanted to --
MR. COLBY: I just -- I didn't quite understand
what Mark meant, but I think there may be a difference in a
question of whether someone can put up their quotes alone,
and then have that distributed out to customers, just their
quotes, and there is a difference between someone -- and it
blurs on the edges, it clearly blurs on the edges.
But whether you can add value-added data in depth
of book and other things that people want to see that aren't
available currently with the options data, and whether that
should be hindered by having to also combine it with an NBBO
calculation, one is saying, "I'm giving -- I want to be free
to give my quote and have people receive my quote alone, even
though there is a consolidated quote out there." The other
is to say, "Like, I've got lots of other stuff that people
could use, and does that have to be packaged with the NBBO
and last sale?"
MS. NAZARETH: I agree with Bob. I think what
troubles me about the question that was being posed was I
wasn't sure everybody was sort of framing the issue the same
way. What I heard, you know, Phil say was well, there were
Like, if you were showing your limit order book,
where you didn't want to be inhibited from doing that, I
think that's a very different issue from saying, "Should
there be no vendor display rule under any circumstances?" So
I guess that's why I had problems with the way the question
was phrased. So --
MR. TELLINI: So perhaps what you could do is you
could say that information could be disseminated, and it
would have to include an official SEC disclaimer that says
that this is information not to be construed as a
representation of the best inside market of the stock.
MR. BROOKS: But doesn't anyone who is involved in
executing an order need -- be required to know what the NBBO
is to properly discharge their fiduciary obligation for
execution? So I don't --
PARTICIPANT: A broker-dealer.
MR. BROOKS: A broker-dealer, an investment
advisor, somebody. So I get a little blurred here. How can
you do one without the other? And I'm with you, Gerry, if
you want to put something out for free, terrific, you know?
MR. PUTNAM: The point is that everyone does want
that information. Therefore, there is demand for it.
Therefore, someone will supply it.
MR. SELIGMAN: Simon?
PROF. JOHNSON: I think we had a very long,
detailed discussion, many of the same people, on this very
issue when we were talking about equities. And my clear
recollection is there was an agreement around the table that
having a vendor display rule, so requiring vendors to display
the NBBO, was actually essential.
And the reason we agreed on that, I think -- we'd
have to go back and look at the transcript -- was there was a
feeling that this theory put forward by Datek, primarily,
perhaps also supported by other people in the room, is that
there is this theory that just letting the market take care
of the NBBO was a very dangerous basis on which to proceed.
It might work out that way, but it doesn't seem at all to be
consistent with what we see other financial markets around
the world or in the U.S. financial history.
So, it's an attractive theory, but I think it has
very little empirical basis, and I think it would be
extremely risky to do it in equities. That's what people
felt, and I don't understand why it's coming up again now,
seemingly being taken more --
MR. SELIGMAN: Let's do this. I would like to
finish within the next few minutes, unless it's unavoidable.
Mark asked for a show of hands. I think he's entitled to it.
How many would favor not having a vendor display rule for the
NBBO in the options exchanges?
Okay, and I am going to just recite the names.
Mike Atkin, Michael Dorsey, Brian McNelis, Bill Harts, Gerry
Putnam, Cameron Smith, and Mark Tellini. And we'll reflect
that. And Dave Johnson, are you still there?
MR. JOHNSON: Yes, yes.
MR. SELIGMAN: And so I can't see your hand, but
you would support this, as well?
MR. JOHNSON: Yes, sir.
MR. SELIGMAN: Okay. I take it, on a committee of
24, that would indicate that the others would support this,
or would abstain. Let me ask, how many abstain? All right,
so I take it there is a significant minority, which is
reflected by those individuals who have taken that position.
Now, late in the day, I'm going to ask this
question and I'm at risk of shuddering the way others have.
Are there other issues anyone wants to put on the table with
respect to options?
MR. SELIGMAN: All right. Let me -- I have two
final, then, issues to address. Would anyone from the public
like to pose questions or make comments at this time? I
don't see it. All right.
Let me focus, then, on where we go from here. We
have received several thoughtful comments on the draft. We
need any remaining comments no later than close of business
on Monday. And I know Schwab has indicated that they were
going to provide comments. Mark, will that give you
sufficient time to provide comments?
MR. TELLINI: I will check with the people who are
diligently working on the conference right now.
MR. SELIGMAN: Okay. Really grateful, close of
MR. ATKIN: Joel, what happens after that? You
still have an opportunity to weigh in?
MR. SELIGMAN: Well, let me explain. Because what
we will do is the comments we receive by then we'll be able
to integrate into the next draft. The next draft, among
other things, will attempt to build into it comments
received, build into it data received, and build into it a
statement of where we were with options.
It is my hope, and I won't frame it any more
aggressively than that, to be able to circulate the next
draft by early August. There will be tight turnaround time
with respect to processing it. I assume we will need at
least three drafts for this.
So that my sense is the next draft, we may have
something like a week to 10 days to turn it around again. We
will get it to you as quickly as we can, but I am determined
to meet our September 15th deadline. And because there have
been some thoughtful comments, and will be others, we want to
be sure we assimilate and integrate all of them in an
effective and fair way. Mike and then Mark, in a second.
MR. ATKIN: Close of business Monday to get a next
draft for early August turnaround, correct?
MR. SELIGMAN: Close of business for your comments.
The SEC has to really work with them, in terms of doing a
first draft, and then working with me, back and forth.
MR. ATKIN: And the next draft would include
anything that you're proposing as attachments, or external
sources that are feeding into this process that would be
reflected somehow in the report, correct?
MR. SELIGMAN: If you wish to add attachments, you
can add them to the second draft, as well as the first. We
have so far indicated that there will be the following
attachments: number one, the charter of the committee,
number two, there were several competing consolidator models
we will attach, number three, I have suggested to Mike in a
sidebar conversation I'd like to attach the two FSDA surveys.
There may be other attachments before we're through. I'd
like to have a complete record.
MR. ATKIN: I'd just like to specifically talk
about the letter on core data from Bloomberg. Does that get
attached to the report, or --
MR. SELIGMAN: It potentially can, and I'd like a
request from Bloomberg, but certainly it raises some
interesting issues. Mark?
MR. TELLINI: So first, I'd like to request that
our white paper, which we just submitted, be attached to the
report. I think that goes to the concern we have in reading
a 66-page report and counting all of 4 sentences that
actually recount the harms that this process is purported to
MR. SELIGMAN: Mark, let me address that. I'd be
glad to have a separate statement from Schwab, if it wishes
that to be it. That would be fine. You may find that you
would want to bend that into, or incorporate that into a
different framework before you're done. But if you wish that
to be it, that would be fine.
MR. TELLINI: Our dissent, if you will? The other
question I have is, again, 66 pages, most of which was mostly
taken up with an overview of how the system works on paper,
again, 4 sentences of discussion about how it actually works
in the eyes of the users, but you're looking for comments
back by Monday, and there is very little to actually comment
on, other than the fact that there isn't much to comment on.
I'm assuming open, substantive questions about how
a competing consolidator model would work, what are the rules
under which it would work, no discussion of the costs and
benefits of that model or the display rule -- I'm just
wondering, are you looking to us to actually write big
sections of this?
MR. SELIGMAN: No, I'm asking for comments. And
you'll see several illustrations have come in from other
members of the committee, and they have not had a difficulty
posing comments ranging from factual and accuracies to issues
they don't think were fleshed out enough, to concerns they'd
like to have expressed in the report, to differences of
opinion. And all that, certainly, are options available to
Schwab, as any other member.
MR. TELLINI: Okay. So -- but, for example, I know
Professor Langevoort had come in with a more precise
clarification of a competing consolidator model. Are we
commenting on each other's comments --
MR. SELIGMAN: No, I --
MR. TELLINI: -- and ultimately we're going to --
MR. SELIGMAN: Just on the report.
MR. TELLINI: Okay.
MR. SELIGMAN: And if you want to say, "We echo Don
Langevoort's position," that's fine.
MR. JOHNSON: Joel, this is Dave.
MR. SELIGMAN: Dave?
MR. JOHNSON: Will you be sending this to Matt
MR. SELIGMAN: Yes, he's a member of the committee.
MR. JOHNSON: All right, you'll send it to him?
MR. SELIGMAN: Yes.
MR. JOHNSON: Great, thank you.
MR. SELIGMAN: All right. This has been,
obviously, a long time before lunch. But nonetheless, before
we adjourn from our final meeting together, let me thank all
of you who are here and to the extent the transcripts are
read by others, all who participated earlier.
I think we have reached a number of thoughtful
conclusions on very important issues. I think this report is
going to make a real contribution to the Commission.
I will say, when I began this I did not anticipate
that within what is the relatively short life of this
committee there would be three separate chairs of the SEC,
but my anticipation is we will be delivering this report
perhaps some time late August or early September to a new
I think what has been impressive to me has been
both how much ground we've covered, and the issues on which
we reached consensus.
I want to express my personal gratitude, first, to
Annette and Bob, and David from the SEC, who have been
stalwart in their support and help to this project, Dorothy
Levitt, and Laura Ungar, for their support as well.
And then second, I want to thank all of you who
have participated in the meetings, who participated in the
written submissions, or will participate in the future. I
think you've made a real contribution. It's been a pleasure
working with you, and I will look forward someday to this
being reduced to a final report.
Thank you, all.
(Whereupon, at 1:40 p.m., the meeting was