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U.S. Securities and Exchange Commission

UNITED STATES OF AMERICA
before the
SECURITIES AND EXCHANGE COMMISSION

Securities Exchange Act of 1934
Release No. 43268 / September 11, 2000

Administrative Proceeding
File No. 3-10282

In the Matter of


CERTAIN ACTIVITIES OF

OPTIONS EXCHANGES

Respondent.

ORDER INSTITUTING
PUBLIC ADMINISTRATIVE
PROCEEDINGS
PURSUANT TO SECTION
19(h)(1) OF THE
SECURITIES EXCHANGE
ACT OF 1934, MAKING
FINDINGS AND IMPOSING
REMEDIAL SANCTIONS

I.

The Securities and Exchange Commission ("Commission") deems it appropriate, in the public interest, and for the protection of investors that public administrative proceedings be instituted pursuant to Section 19(h)(1) of the Securities Exchange Act of 1934 ("Exchange Act") against respondents American Stock Exchange LLC, Chicago Board Options Exchange, Inc., Pacific Exchange, Inc. and Philadelphia Stock Exchange, Inc. In anticipation of this proceeding, the respondents have submitted Offers of Settlement which the Commission has determined to accept. Solely for the purposes of this proceeding and any other proceeding brought by or on behalf of the Commission or to which the Commission is a party, and prior to a hearing pursuant to the Commission's Rules of Practice, 17 C.F.R. ' 201.100 et seq., the respondents, by their Offers of Settlement, without admitting or denying the Commission's findings except

those contained in Section III. A. below, which are admitted, consent to the entry of this Order Instituting Public Administrative Proceedings, Making Findings and Imposing Remedial Sanctions.

II.

Accordingly, IT IS HEREBY ORDERED that proceedings pursuant to Section 19(h)(1) of the Exchange Act be, and they hereby are, instituted.

III.

On the basis of this Order and the Offers of Settlement submitted by the respondents, the Commission finds1 that:

A. RESPONDENTS

1. The American Stock Exchange LLC

The American Stock Exchange LLC ("AMEX") is located in New York, New York. The AMEX is registered with the Commission as an exchange pursuant to Section 6 of the Exchange Act.

2. The Chicago Board Options Exchange, Inc.

The Chicago Board Options Exchange, Inc. ("CBOE") is located in Chicago, Illinois. The CBOE is registered with the Commission as an exchange pursuant to Section 6 of the Exchange Act.

3. The Pacific Exchange, Inc.

The Pacific Exchange, Inc. ("PCX") is located in San Francisco, California and Los Angeles, California. Options trading on the PCX is conducted in its San Francisco facilities. The PCX is registered with the Commission as an exchange pursuant to Section 6 of the Exchange Act.

4. The Philadelphia Stock Exchange, Inc.

The Philadelphia Stock Exchange, Inc. ("PHLX") is located in Philadelphia, Pennsylvania. The PHLX is registered with the Commission as an exchange pursuant to Section 6 of the Exchange Act.

B. OVERVIEW

The Commission, in its oversight of the options exchanges, has investigated significant issues relating to the competitiveness of the options market and the fulfillment by the options exchanges of their obligations as self-regulatory organizations. Section 19(g) of the Exchange Act obligates registered exchanges to comply with their own rules and to enforce compliance with their own rules by their members and persons associated with their members. The options exchanges have significantly impaired the operations of the options market by (a) following a course of conduct under which they refrained from multiply listing a large number of options; and (b) inadequately discharging their obligations as self-regulatory organizations by failing adequately to enforce compliance with (i) certain of their rules, including order handling rules, that promote competition as well as investor protection, and (ii) certain of their rules prohibiting anticompetitive conduct, such as harassment, intimidation, refusals to deal and retaliation directed at market participants who sought to act competitively. In addition, the options exchanges each have inadequately discharged their obligations as self-regulatory organizations by failing to enforce compliance with their trade reporting rules, which promote transparency of the market and facilitate surveillance and enforcement of other exchange rules and the federal securities laws. These matters are discussed below.

C. THE RESPONDENT EXCHANGES' IMPEDIMENTS TO MULTIPLE LISTING OF OPTIONS

1. Respondents Followed a Course of Conduct that Limited Multiple Listing

Rule 19c-5 under the Exchange Act2 incorporates into the rules of all exchanges a prohibition against any "rule, stated policy, practice or interpretation" that prohibits or conditions the listing of any stock option class listed on another exchange.

The respondent options exchanges failed to comply with Rule 19c-5 as incorporated into their rules, by following a course of conduct under which they refrained from multiply listing certain options listed on a single exchange that were available for multiple listing.3 In this connection, the respondents engaged in certain courses of conduct that hindered, discouraged or prevented the multiple listing of these exclusively listed options, including, among other things, the following:

a. The respondents maintained (i) an improper interpretation of procedures for the listing of options that impeded the multiple listing of options, and (ii) improper limitations on the listing of options that hindered the multiple listing of options of merged entities;

b. Certain respondents improperly deterred efforts by their members to have the respondents multiply list options; and

c. Certain respondents utilized their voting power in the Options Price Reporting Authority ("OPRA"), which provides for the transmission of quotations and trade reports from the options market to vendors for dissemination to the public, in an impropereffort to limit transmission capacity in order to hinder and discourage multiple listing of an option.

These activities are discussed below.

2. Respondents Impeded Competition in Multiple Listing

a. Respondents' Interpretation of the Joint-Exchange Options Plan Inhibited the Multiple Listing of Options

On September 17, 1991, the Commission approved the Joint-Exchange Options Plan (the "Joint Plan"), which set forth procedures governing the listing of new options. The Joint Plan did not restrict the multiple listing of options that were already exclusively listed at the time of the plan'sadoption. The respondent exchanges participated in communications with each other about the meaning of the Joint Plan after it was authorized by the Commission, which led to their interpretation that the absence of procedures regarding the exclusively listed options prevented them from multiply listing any of the exclusively listed options. This interpretation of the Joint Plan improperly created a barrier to the multiple listing of options.

b. Respondents' Course of Conduct Impaired the Multiple Listing of Options for Merged Entities

The respondent exchanges followed a course of conduct that impaired the multiple listing of options of merged entities. In general, when a public company acquired another public company, both of which had options for their securities exclusively listed on different exchanges, the respondent exchange on which options for the acquiring company were listed would thereafter list the options for the merged entity. The respondent exchange on which the options for the acquired company had been listed would refrain from listing the options of the merged entity.

When the respondent exchanges listing the options for the acquiring and acquired companies disagreed about which of them should list the options for the merged entity, the exchanges followed a procedure for resolving the disagreement that resulted in only one of the two exchanges listing the option for the merged entity, thereby improperly limiting competition in listings.

c. Respondents Discouraged Competitive Action by Their Members

Member firms of certain of the respondent exchanges made proposals to multiply list options. In order to avoid or defer multiple listing, the respondent exchanges rebuffed or denied these proposals without an adequate basis in their rules and, in some instances, threatened or harassed member firms who made the proposals.

d. Certain Respondents Acted Through OPRA to Limit Transmission Capacity

OPRA provides for the transmission of quotation and trade data from the options exchanges to vendors that disseminate such data to public subscribers. OPRA historically has contracted with a third party for transmission capacity. The transmission capacity is quantitatively limited at any given point in time. In June 1998, the options exchanges met at OPRA to discuss the possibility of accelerating the expansion of their transmission capacity. Certain of the respondents voted against the acceleration in order to prevent the multiple listing of an option. This resulted in a tie vote and the planned capacity expansion was not accelerated. The results of the vote in this instance allowed the facilities of OPRA to be used improperly to discourage multiple listing of an option.

e. In August 1999, the Respondent Exchanges Began to Multiple List Options

In August 1999, and soon thereafter, the respondent exchanges initiated multiple listing of a number of formerly exclusively listed options.

D. THE RESPONDENT EXCHANGES' PERFORMANCE AS SELF-REGULATORY ORGANIZATIONS

The Exchange Act requires the respondents, as registered exchanges, to conduct oversight of their members and their markets.4 In conducting such oversight, the respondents must comply with, and vigorously enforce, in an evenhanded and impartial manner, the provisions of the Exchange Act, the rules and regulations thereunder and their own rules. The respondents have the affirmative obligation to be vigilant in surveilling for and taking effective enforcement action to address violations of such provisions.

The respondents have not satisfied their obligations under the Exchange Act to enforce their rules and the federal securities laws, in that they have inadequately surveilled their markets for potential violations, failed to conduct thorough investigations when needed, and failed adequately to enforce rules applicable to members on their floors. As a result of these regulatory deficiencies, the respondents have violated the Exchange Act. In addition, the respondents have not adequately addressed issues of competition that have arisen in their markets. The respondents' regulatory deficiencies are discussed at greater length below.

1. Respondents Have Engaged in Inadequate Enforcement of Order Handling Rules, Policies or Procedures

The respondents failed effectively to enforce compliance by their members with exchange rules, policies or procedures relating to order handling. More specifically, the respondents have failed effectively to surveil for, or take appropriate action with respect to evidence of, violations of priority rules,5 firm quote rules,6 and limit order display rules, policies or procedures7. Respondents generally lack automated surveillance systems, and rely too heavily on complaints to detect potential violations. In addition, when violations were uncovered, respondents, in many instances, did not take appropriate enforcement action. In many other instances, if enforcement action was taken, respondents did not impose sanctions adequate to provide reasonable deterrence against future violations. As a result of these deficiencies in surveillance and enforcement, the respondents did not adequately enforce their order handling rules.

2. Respondents Have Permitted Deficiencies in Trade Reporting

The respondents failed effectively to enforce compliance by their members with exchange trade reporting rules. The respondents have conducted either no automated surveillance, or inadequate automated surveillance, of trade reporting. Their existing surveillance processes have been inadequate to ensure compliance with their trade reporting rules. As a consequence, the respondents failed adequately to detect noncompliance by their members.

The respondents applied their trade reporting requirements in a manner that often allowed trades not to be reported in a sufficiently prompt manner or they utilized surveillance parameters that were not sufficiently comprehensive to adequately detect noncompliance with the rules. The inadequacies of the respondents' application of their trade reporting rules and surveillance for rule violations have undermined effective enforcement of those rules. Ensuring reliable trade reporting enhances the transparency of the markets and effective surveillance and enforcement with respect to order handling and other rules.

3. Respondents Have Failed Appropriately to Enforce Rules Relating to Harassment and Intimidation of Members

The respondents have failed adequately to surveil for, or take appropriate action with respect to evidence of, harassment and intimidation of members who acted competitively or sought to act competitively. Certain members on the floors of the respondent exchanges who competed or sought to compete on certain occasions have indicated that they have been subjected to harassment, intimidation, refusals to deal and retaliation by other participants on the floors of the respondent exchanges. The indicated harassment, intimidation, refusals to deal and retaliation were, in various instances, verbal, economic or physical conduct, and could violate exchange rules.

The respondents' surveillance for such improper conduct was deficient, in that it relied on complaints and the observations of limited numbers of floor officials. The respondents did not have effective means of surveillance for refusals to deal or economic retaliation. The respondents also responded inadequately to indications of rule violations that were brought to their attention. In some instances, floor officials overlooked indications of rule violations by, or addressed them selectively against, some members, but not others. In a number of instances, the respondent exchanges did not investigate or failed adequately to investigate allegations of harassment, intimidation, refusals to deal and retaliation.

In addition, the respondents have not taken appropriate steps to inquire into quoting activities on their markets. Bid-ask quotations made on respondents' markets have frequently been at the maximum allowable bid-ask spreads.8 The frequency of maximum spreads may indicate anticompetitive conduct. The respondents have not adequately surveilled or investigated for anticompetitive conduct that may be indicated by the high frequency of maximum spreads.

E. CONCLUSION

Based upon the foregoing, the Commission finds that during the relevant period the AMEX, CBOE, PCX and PHLX failed to comply with certain of their rules, including, among others, Rule 19c-5 promulgated under the Exchange Act, and, without reasonable justification or excuse, failed to enforce compliance with certain of their own rules, in violation of Section 19(g) of the Exchange Act.

IV.

In view of the foregoing, it is appropriate, in the public interest, and for the protection of investors to impose the sanctions specified in the Respondents' Offers of Settlement.

Accordingly, IT IS HEREBY ORDERED THAT:

A. The AMEX, CBOE, PCX and PHLX be, and hereby are, censured.

B. The AMEX, CBOE, PCX and PHLX comply with the following undertakings within the time frames specified below, or such longer times as are (a) provided by further order of the Commission or (b) approved in writing by the Directors of the Commission'sDivision of Enforcement, Division of Market Regulation and Office of Compliance Inspections and Examinations:

a. No later than four months after the date of this Order, each respondent exchange shall, acting jointly with all other options exchanges, amend the Joint-Exchange Options Plan (the "Joint Plan"), so as to: (i) eliminate advance notice to any other exchange, alternative trading system, or other trading venue that lists options issued by the Options Clearing Corporation (collectively referred to herein as Amarkets") of the intention to list a new option; (ii) eliminate advance notice to any other market of the intention to list an existing option, except for not more than one business day'snotice to any other market that already lists or has applied to list the option in question; (iii) eliminate any provisions of the Joint Plan (other than any advance notice provision permissible under (ii) of this subsection) that prevent a market from commencing to list or trade any option listed on another market or an option that another market has expressed an intent to list; (iv) eliminate any provisions of the Joint Plan allowing one market to prevent or delay another market from listing an option; and (v) eliminate any provisions of the Joint Plan that allow one market to delay the commencement of trading of an option by another market. Nothing in this subsection shall prohibit any exchange from providing (a) not more than one business day'snotice to the Options Clearing Corporation of the exchange'sintention to list an existing option, or (b) reasonable advance notice to the Options Clearing Corporation of the exchange'sintention to list a new option. As part of its compliance with this undertaking, each respondent exchange shall, acting jointly with all other options exchanges, discuss, develop, and provide to the Commission staff, no later than 60 days after the date of the Order, draft proposed amendments to the Joint Plan that comply with Section 19 of the Exchange Act and Rule 19b-4 thereunder and which would be, if approved by the Commission, sufficient to effect the changes required by this undertaking; provided, however, that in the absence of joint agreement after a good faith effort to reach joint agreement, each respondent exchange shall individually provide to the Commission staff, no later than 90 days after the date of the Order, draft proposed amendments reasonably designed to effect the changes required by this undertaking.

b. No later than six months after the date of this Order, each respondent exchange shall adopt new, or amend existing, rules that establish formal procedures for exchange members (whether specialists, Designated Primary Market Makers, Lead Market Makers, or others) to submit proposals for such respondent exchange to list particular options classes (whether or not such options are already traded on any other exchange), which shall (i) specify the criteria to be considered by such respondent exchange in deciding whether or not to approve such proposals, or in placing conditions or limitations, if any, on the approval of such proposals; (ii) provide for a reasonable time frame in which such proposals will be reviewed and decisions thereon made; (iii) require such respondent exchange to respond in writing to any proposal that is denied or which is subject to conditions or limitations, and specify in such written response the bases for the denial or the conditions or limitations; and (iv) in such new or amended rules, or in code of conduct provisions approved by the Commission, prohibit any member, officer, director, governor, employee, committee member or agent of such respondent exchange, or any other person or entity subject to its jurisdiction, from threatening, harassing or retaliating against any person or entity in any way because (aa) of a listing proposal made by such person or entity to any exchange or other market; (bb) of such person'sor entity'sadvocacy or proposals concerning listing or trading on any exchange or other market; or (cc) such person or entity commences to make markets in or trade any option on any exchange or other market.9 Actions taken by the respondent exchanges in accordance with rules filed with and approved by the Commission pursuant to Section 19 of the Exchange Act shall not be deemed to be threats, harassment or retaliation for the purposes of this undertaking. As part of its compliance with this undertaking, each respondent exchange shall provide to the Commission staff, no later than 120 days after the date of the Order, draft proposed rules, rule amendments, and/or code of conduct provisions, that comply with Section 19 of the Exchange Act and Rule 19b-4 thereunder and which would be, if approved by the Commission, sufficient to effect the changes required by this undertaking.

c. Each respondent exchange shall act jointly with all other options exchanges to amend the Plan for Reporting of Consolidated Options Last Sale Reports and Quotation Information ("Plan") no later than one year after the date of this Order, so as to modify the structure and operation of the Options Price Reporting Authority ("OPRA") in a manner that (i) establishes a system for procuring and allocating options market data transmission capacity ("capacity") that eliminates joint action by the participants in OPRA in determining the amount of total capacity procured and the allocation thereof, and provides that each participant in OPRA will independently determine the amount of capacity it will obtain; (ii) establishes a system for gathering and disseminating business information from and to participants of OPRA such that all nonpublic information specific to a participant in OPRA shall remain segregated and confidential from other participants (except for information that may be shared in connection with activities permitted under Section 3.c.(iii) hereof); and (iii) sets forth a statement of OPRA'sfunctions and objectives, as permitted under the Exchange Act, and provides for rules and procedures that limit any joint action with respect to OPRA by the participants in OPRA to circumstances in which such joint action is necessary in order to fulfill the stated functions and objectives. As part of its compliance with this undertaking, each respondent exchange shall, acting jointly with all other options exchanges, discuss, develop, and provide to the Commission staff, no later than six months after the date of the Order, draft proposed amendments to the Plan, pursuant to and in compliance with Section 11A of the Exchange Act, which would be, if approved by the Commission, sufficient to effect the changes detailed above in this undertaking no later than one year from the date of this Order; provided, however, that in the absence of joint agreement after a good faith effort to reach joint agreement, each respondent exchange shall individually provide to the Commission staff, no later than seven months after the date of the Order, draft proposals reasonably designed to effect the changes required by this undertaking.

d. Pursuant to Section 17(b) of the Exchange Act and Rule 17a-1(c) promulgated thereunder, each respondent exchange shall simultaneously provide to the Directors of the Divisions of Enforcement and Market Regulation, and of the Office of Compliance Inspections and Examinations, all reports and documents provided by such respondent exchange to the Antitrust Division of the U.S. Department of Justice ("D.O.J.") pursuant to such respondent exchange's settlement of a civil action instituted by D.O.J. substantially contemporaneously with the institution of this proceeding.

e. Each respondent exchange shall, acting jointly with all other options exchanges, design and implement a consolidated options audit trail system ("COATS"), as specified below, that will enable the options exchanges to reconstruct markets promptly, effectively surveil them and enforce order handling, firm quote, trade reporting and other rules. Specifically, each respondent exchange, acting jointly with all other options exchanges, shall: (i) no later than six months after the date of the Order, synchronize its trading and supporting systems time clocks with all other options exchanges; (ii) no later than nine months after the date of the Order, design and implement a method to merge all options exchanges' reported and matched transaction data on a daily basis and disseminate this merged data among all options exchanges using a uniform computer-readable format (the "common computer format"); (iii) no later than twelve months after the date of the Order, incorporate its own quotes and the National Best Bid and Offer as displayed in its market with the merged transaction data ("merged transactions and quotations data") in such a manner that it could be promptly retrieved and readily merged in the common computer format with other options exchanges' merged transactions and quotations data; (iv) no later than eighteen months after the date of the Order, design and implement an audit trail that provides an accurate, time-sequenced record of electronic orders, quotations, and transactions on such respondent exchange, beginning with the receipt of an electronic order by such respondent exchange, and further documenting the life of the order through the process of execution, partial execution, or cancellation of that order, which audit trail shall be readily retrievable in the common computer format; and (v) no later than twenty-four months after the date of the Order, incorporate into the audit trail all non-electronic orders (such that the audit trail provides an accurate, time-sequenced record of electronic and other orders, quotations and transactions on such respondent exchange, beginning with the receipt of an order by such respondent exchange and further documenting the life of the order through the process of execution, partial execution, or cancellation of that order, which audit trail shall be readily retrievable in the common computer format. Concurrently with the design of each part of COATS, each respondent exchange shall also design effective surveillance systems, or effectively enhance existing surveillance systems, to use the newly available COATS data to enforce the federal securities laws and such exchange'srules, and shall promptly implement such surveillance systems after implementing the corresponding part of COATS. As part of its compliance with this undertaking, each respondent exchange shall, acting jointly with all other options exchanges, discuss, develop and provide to the Commission staff, at least 90 days before the respective deadlines for items (i) through (v) above, a draft proposed plan, or draft proposed rules or rule amendments relating to the item that is the subject of the deadline which comply with Section 19 of the Exchange Act and Rule 19b-4 thereunder, and which would be, if approved by the Commission, sufficient to effect the changes required by each of these items; provided, however, that in the absence of joint agreement after a good faith effort to reach joint agreement, each respondent exchange shall individually provide to the Commission staff, at least 60 days before the deadlines above, a draft proposed plan, or draft proposed rules or rule amendments reasonably designed to effect the changes required by each of those items of this undertaking.

f. Each respondent exchange shall promptly enhance and improve its surveillance, investigative and enforcement processes and activities with respect to options order handling rules, including, the duty of best execution with respect to the handling of orders after the broker-dealer routes the order to such respondent exchange, compliance with limit order display rules, priority rules, trade reporting and firm quote rules.

g. No later than six months after the date of this Order, each respondent exchange shall adopt new, or amend existing, rules that require trades to be reported within 90 seconds, or less, of the time of execution of the trade. As part of its compliance with this undertaking, each respondent exchange shall provide to the Commission staff, no later than 120 days after the date of the Order, draft proposed rules or rule amendments that comply with Section 19 of the Exchange Act and Rule 19b-4 thereunder and that would be, if approved by the Commission, sufficient to effect the changes required by this undertaking.10

h. Each respondent exchange shall:

(i) no later than one year after the date of this Order, adopt new, or amend existing, rules concerning its automated quotation and execution systems which (aa) substantially enhance incentives to quote competitively and substantially reduce disincentives for market participants to act competitively; and (bb) specify the circumstances, if any, under which automated execution systems can be disengaged or operated in any manner other than the normal manner set forth in the exchange'srules and require the documentation of the reasons for each decision to disengage an automated execution system or operate it in any manner other than the normal manner. As part of its compliance with this undertaking, each respondent exchange shall provide to the Commission staff, no later than six months after the date of the Order, draft proposed rules or rule amendments that comply with Section 19 of the Exchange Act and Rule 19b-4 thereunder and that would be, if approved by the Commission, sufficient to effect the changes required by this undertaking.

(ii) no later than six months after the date of this Order, adopt rules, rule amendments or interpretations, or code of conduct provisions approved by the Commission, that expressly prohibit harassment, intimidation, refusals to deal and retaliation by exchange members, or by officers, directors, governors, employees, committee members, and other officials and agents of such exchange, against exchange members or other market participants for acting, or seeking to act, competitively. As part of its compliance with this undertaking, each respondent exchange shall provide to the Commission staff, no later than 120 days after the date of the Order, draft proposed rules, rule amendments or interpretations, and/or code of conduct provisions, that comply with Section 19 of the Exchange Act and Rule 19b-4 thereunder and that would be, if approved by the Commission, sufficient to effect the changes required by this undertaking.11

(iii) promptly enhance and improve its surveillance, investigative and enforcement processes and activities with a view to preventing and eliminating (aa) harassment, intimidation, refusals to deal and retaliation against market participants for acting competitively, or seeking to act competitively, and (bb) other anticompetitive conduct.

i. No later than one year after the date of this Order, each respondent exchange shall adopt rules establishing, or modifying existing, sanctioning guidelines such that they are reasonably designed to effectively enforce compliance with such exchange'soptions order handling rules, including, the duty of best execution with respect to the handling of orders after the broker-dealer routes the order to such respondent exchange, limit order display, priority, firm quote, and trade reporting rules. As part of its compliance with this undertaking, each respondent exchange shall provide to the Commission staff, no later than nine months after the date of the Order, draft proposed rules or rule amendments that comply with Section 19 of the Exchange Act and Rule 19b-4 thereunder and that would be, if approved by the Commission, sufficient to effect the changes required by this undertaking.

j. No later than twelve months after the date of this Order, each respondent exchange shall adopt new, or amend existing, rules to include any practice or procedure, not currently authorized by rule, whereby market makers trading any particular option class determine by agreement the spreads or option prices at which they will trade any option class, or the allocation of orders in that option class. As part of its compliance with this undertaking, each respondent exchange shall provide to the Commission staff, no later than six months after the date of the Order, draft proposed rules or rule amendments that comply with Section 19 of the Exchange Act and Rule 19b-4 thereunder that would be, if approved by the Commission, sufficient to effect the changes required by this undertaking. Each respondent exchange shall take all reasonable steps within six months after the date of this Order to promptly stop any other such practice or procedure if neither it nor a related practice or procedure that would supersede the existing practice or procedure, has been submitted to the Commission for approval or is not already authorized by rule.

k. The rule changes adopted pursuant to these undertakings shall not preclude a respondent exchange from exercising or enforcing an intellectual property right in an option, or a license of an intellectual property right in an option, if another exchange proposes to list or has listed the option and such respondent exchange has a good faith belief that the intellectual property right or license thereof exists and the action taken is consistent with the federal securities laws and the Commission'srules, regulations and orders.

l. The respondent exchanges shall, for each of calendar 2000 and 2001, expend for options-related surveillance systems and for staffing in the areas of options-related surveillance, investigation and enforcement, an annual amount that equals or exceeds: (a) $11 million, in the case of the AMEX; (b) $17 million, in the case of the CBOE; (c) $6.5 million, in the case of the PCX; and (d) $4 million in the case of the PHLX.12 This undertaking shall be deemed fulfilled if the average annual amount of a respondent exchange's expenditures in calendar 2000 and 2001 required by this undertaking equals or exceeds such respondent exchange'sannual amount specified earlier in this undertaking. The fulfillment of this undertaking will not necessarily be deemed sufficient to satisfy any other undertakings in this Order and the fulfillment of all other undertakings shall be determined independently of the fulfillment of this undertaking.13

m. Each respondent exchange shall, on the first three anniversaries after the date of the Order, provide to the Directors of the Divisions of Enforcement and Market Regulation, and of the Office of Compliance Inspections and Examinations, affidavits or affirmations, detailing its progress in implementing undertakings 3.f., 3.h.iii., and 3.l.

n. In evaluating a respondent exchange'scompliance with these undertakings, the Commission will consider: (i) any rule proposals filed by such respondent exchange since August 1, 1999, or any rules adopted by such respondent exchange since August 1, 1999, which are relevant to the purposes of any of the undertakings; and (ii) any and all steps taken since August 1, 1999 by such respondent exchange to enhance and improve its surveillance, investigative and enforcement processes and activities in any manner relevant to the purposes of any of the undertakings. The Order specifically notes any instances in which the rules previously proposed and adopted by a respondent exchange, or the steps previously taken by a respondent exchange to enhance and improve its surveillance, investigative and enforcement processes and activities, shall be deemed to have fulfilled a particular undertaking.

By the Commission.

________________________
Jonathan G. Katz
Secretary

Footnotes

1

The findings herein are made pursuant to the respondents' Offers of Settlement and are not binding on any other person or entity in this or any other proceeding. Moreover, the findings made herein do not affect any respondent'srights in any respect as to parties other than the Commission.

2

17 C.F.R. ' 240.19c-5.

3

For purposes of determining whether the exchanges violated Section 19(g) of the Exchange Act and Rule 19c-5 as incorporated into their rules, the Commission need not determine, and does not in this Order decide, whether or not this course of conduct was pursuant to an agreement among them. The conduct was inconsistent with Rule 19c-5 as incorporated into their rules either way. However, nothing stated herein would be inconsistent with a finding that the exchanges have engaged in collective conduct.

4

Sections 19(g) and 19(h) of the Exchange Act, 15 U.S.C. '' 78s(g) and 78s(h).

5

With certain exceptions, priority rules generally require that a customer limit order be executed before any other orders if it has the best price (i.e., highest bid or lowest offer). If there is more than one order at the best price, the customer order that arrived at the trading post first has priority.

6

Firm quote rules require specialists or market makers to trade specified minimum numbers of options at the prices they quote.

7

The exchanges' limit order display rules, policies or procedures generally require that customer limit orders that are priced better than the highest bid or lowest ask price otherwise quoted on the exchange be displayed in the quotations.

8

The "bid-ask" spread is the difference between the highest quoted bid price and the lowest quoted ask price. The respondent exchanges have rules prescribing maximum spreads that can be quoted for options.

9

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

10

The AMEX, the CBOE and the PHLX have adopted new, or amended existing, rules required by this undertaking IV.B.g.

11

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

12

The amounts specified for each respondent do not reflect any determination of a respondent'srelative degree of culpability with respect to the conduct alleged in the Order.

13

If, over the course of calendar 2000 or 2001, the Board of Governors or Directors of a respondent exchange believe that the specified expenditures are not achievable or feasible, or are unwarranted in light of changed circumstances, such respondent exchange may, by application to the Commission, seek modification of this undertaking.

http://www.sec.gov/litigation/admin/34-43268.htm


Modified:09/18/2000