[12541]
August 29, 2000
TO: EQUITY MARKETS ADVISORY COMMITTEE No. 46-00
RE: SEC APPROVES JOINT OPTIONS INTERMARKET LINKAGE PLAN
The Securities and Exchange Commission has issued an order authorizing the American
Stock Exchange, the Chicago Board Options Exchange, and the International Securities
Exchange to act jointly to implement an intermarket linkage plan (the “Amex/CBOE/ISE
plan”).1 The Amex/CBOE/ISE plan was originally filed by the three exchanges pursuant to an
SEC order, which directed all the options exchanges to file a national market system plan that
would link the options markets.2 The most significant aspects of the Amex/CBOE/ISE plan are
summarized below.
Price/Time Priority. The Amex/CBOE/ISE plan does not provide for price/time
priority and instead allows the exchange initially receiving an order to step up to match the
better price being disseminated by another market. The Release states that the SEC believes that
given many of the concerns expressed by market participants regarding price/time priority and
the uncertainty of how impending changes to the structure of the securities markets,
particularly the implementation of decimalization, will impact the options markets, it is not
practicable at this time to require a price/time priority rule in the options markets.
Access to the Linkage. The Amex/CBOE/ISE plan provides access to the linkage to
eligible market makers on behalf of customer orders and to market makers and specialists on
behalf of their principal accounts. Non-market maker broker-dealers, however, would not have
access to the linkage. The Release states that by limiting who has access to the linkage, the
Amex/CBOE/ISE plan reasonably attempts to address the concern that allowing broader access
to the linkage could dilute the value of exchange memberships. The Amex/CBOE/ISE plan
also limits eligible market maker access to the linkage for sending principal orders to less than
twenty percent of each market maker’s total volume. A market maker effecting more than
twenty percent of its volume in a calendar quarter through the linkage would be prohibited
from sending principal orders through the linkage in the subsequent quarter.
1 Securities Exchange Act Release No. 43086 (July 28, 2000), 65 FR 48023 (August 4, 2000) (“Release”).
2 The Pacific Exchange (“PCX”) and the Philadelphia Stock Exchange (“Phlx”) filed separate proposals with the SEC
for alternative linkage plans. Although the three plans were identical with respect to a majority of the issues
pertaining to a linkage, the exchanges were unable to reach agreement on whether the linkage should require that
orders be routed to exchanges based on price/time priority, who should have access to the linkage, and the
appropriate remedy owed when a trade-through occurs.
2Trade-Through Provisions. The Amex/CBOE/ISE plan provides that exchange
members should, absent reasonable justification and during normal market conditions, avoid
initiating trade-throughs, subject to certain exceptions. The plan, however, does not flatly
prohibit trade-throughs and does not provide a remedy to the quotes or orders traded through
unless the aggrieved party complains. The Release states that the SEC recognizes that the plan
may not eliminate trade-throughs in all instances but believes that the plan is beneficial
nevertheless because it provides an efficient means, and some incentive, for exchanges to avoid
trade-throughs.
Governance and Voting Requirements. The Amex/CBOE/ISE plan will be
administered by an Operating Committee, composed of one representative of each participating
exchange, which will have discretion to develop and implement the linkage, and advise
participants regarding deficiencies, problems, or recommendations. The plan also will require a
unanimous vote for plan amendments.
Trade-or-Fade Provisions. The Amex/CBOE/ISE plan will continue to apply the
exchanges’ “trade-or-fade rules”3 in limited circumstances. The Release notes that several
market participants expressed concern that without the repeal of trade-or-fade rules by the
options exchanges, the exchanges do not have to provide firm quotes. The SEC, however,
believes that although no exchange should be permitted to “back away” from its displayed
quote, it recognizes there should be a mechanism that requires a market to change its quote if it
refuses to trade at its published quote with an order for a size that exceeds its firm quote
requirement. The SEC therefore supports the retention of the trade-or-fade rules to the extent
that they prevent markets from refusing to trade at their disseminated prices and then
continuing to disseminate the same quotes.
Ari Burstein
Assistant Counsel
Attachment
Attachment (in .pdf format)
3 Generally, under trade-or-fade rules, an order must be executed at the currently disseminated bid or offer, either by
satisfying the full size of the order or by updating the disseminated quote to reflect that the previously disseminated
quote is no longer available.