Subject: File # S7-16-00

Date:    08/16/2000 5:59 PM
     
     
Jonathan Katz
Secretary, U.S. S.E.C.
     
Dear Mr. Katz:
     
This letter is a comment on the current state of the Listed Options 
Industry.
     
To have 5 Options Exchanges is pure insanity.  Further more, the REASONS 
why
Arthur Levitt wants 5 Options Exchanges are not valid AND the results 
have not
achieved what he thought they would.  As a result of this foolhardiness, 
Payment for
Order Flow is now a way of doing business in the Options Industry. 
Levitt believes
that by "whacking" the Options Industry with every Tom, Dick and Harry 
that has an
idea, is a way of improving the market place through experimentation. 
He is wrong.
     
Here are 4 points to ponder:
     
1.  PFOF will wipe out the Independent Market Maker.  Don't forget that 
they were
once called, "Liquidity Providers."  With them gone, so goes the 
liquidity they
provided.
     
2.  As a result of #1, there will be only Specialists on the other side 
of all trades (the
trades that are not internalized).  The Internalization of Option orders 
is cannibalizing
liquidity.  This, along with PFOF, should be illegal.  This will result 
in less competition
for orders, not more.
     
3.  As a result of thought #2, it will be probable that the Specialist 
in GM Options at
the AMEX will also be the Specialist in GM at the CBOE, PSX and PSX as 
well.  This
is because the larger firms will get larger because the Independent 
Market Makers will
not be able to pay the shakedown money that PFOF requires.
     
4.  If the Specialist (or trader if any are left.. given the fact that 
if a trader trades
10,000 contracts a day he/she will have an additional bill of $4,000 per 
day) is
paying 40 cents per contract just to get the order there, you could be 
damn sure he's
going to make money on that trade.  Either by 'hook or crook' but he's 
going to
make up that extortion money some way.  Spreads will widen.
     
PFOF is a system of bribes, kickbacks, shakedowns and payoffs, that the 
SEC has
allowed to flourish.  As typical of Government Agencies, the symptoms of 
the
problem are being addressed rather than addressing the problem itself. 
The SEC has
proposed a bureaucratic nightmare for Brokers that they must keep 
monthly statistics
on "best execution" (as if a customer is going to brokerage firms month 
by month based
on statistics that the "media" will provide).
     
All of these so called 'problems' have occurred because there was "no 
competition"
among the 4 Options Exchanges (I refer to the so called Gentlemen's 
agreement,
exclusive trading of a particular Option at one Exchange).  Under the 
old way (yes,
the old way!) there was never a chance of a 'trade through', because it 
was against
the law.  An Options investor was always assured that they were getting 
the "Highest
Bid/Lowest Offer with the maximum possible liquidity", all in one 
place.  Under the
old way, there was ZERO FRAGMENTATION!   I contend that the problems we 
have today in the Options Industry are BECAUSE of Multiple Listing and 
it's birth
child, Payment for Order Flow.  ALL of the SEC's tinkering can be 
eliminated if it
would only outlaw Payment of Order Flow AND Internalization of Option 
orders.
     
Any time an order to buy or sell a security is influenced by something 
other then
"Market Forces", you will have corruption.  The SEC has allowed the US 
Securities
Markets to degrade into something ugly and unsafe for investors.
     
The SEC has stood by and allowed "after hours" trading to become a 
nightmare for investors.  After hours trading is another subject for 
another time, however for all of the SEC's concern about Fragmentation, 
the SEC's actions (or lack of, in these cases) has CAUSED 
Fragmentation.  Again, there was NO FRAGMENTATION prior to the SEC's 
concern about competition (which lead to the Multiple Listing of 
Options).  This false claim of collusion is a joke and has resulted in 
millions of dollars of extortion money paid by the PHLX and PSX.  I 
believe the Settlement money that the PHLX and PSX has already paid 
should be taxed as "short term capital gains" to the claimants.
     
The SEC has called for more competition in the Options Markets and this 
mess is
what we got.  I fear to say that Arthur Levitt is remiss in his duties 
as overseer and
protector of the US Securities Markets.
     
Chris Delzio
Member American Stock Exchange
8 Oak Street
Harrison, NY  10528