Joint Industry Plan; Order Granting Approval of Joint Amendments Nos. 2 and 3 to the Options Intermarket Linkage Plan Relating to Satisfaction of Trade-Throughs, the Procedures for Handling Multiple Principal Orders, Restrictions on Withdrawal, and an Implementation Timetable

On November 20, 2001, November 21, 2001, December 10, 2001, December 10, 2001, and December 26, 2001, the Philadelphia Stock Exchange, Inc. (“Phlx”), International Stock Exchange LLC (“ISE”), Chicago Board Options Exchange, Inc. (“CBOE”), Pacific Exchange, Inc. (“PCX”), and American Stock Exchange LLC (“AMEX”) (collectively, the “Participants”), respectively, filed with the Securities and Exchange Commission (“SEC” or “Commission”), pursuant to section 11A(a)(3) of the Securities Exchange Act of 1934 (“Act”) and Rule 11Aa3-2 thereunder, an amendment (“Joint Amendment No. 2”) to the Options Intermarket Linkage Plan. In addition, on April 5, 2002, April 9, 2002, April 15, 2002, April 15, 2002 and April 16, 2002, CBOE, ISE, Phlx, PCX, and Amex, respectively, filed with the Commission an additional amendment (“Joint Amendment No. 3”) to the Linkage Plan.

The proposed amendments to the Linkage Plan were published for comment in the Federal Register on April 30, 2002. No comments were received on the proposal. This order approves the proposed amendments to the Linkage Plan.

I. Description of the Proposed Amendments

A. Proposed Joint Amendment No. 2

In Proposed Joint Amendment No. 2, the Participants propose changes to two provisions of the Linkage Plan to modify: (1) The manner in which a Participant displaying the best published quote may be compensated when its quote represents a customer order and another Participant executes an order for a listed option at a price inferior to the best-published quote displayed on that exchange (“intermarket trade-through”); and (2) the procedures for monitoring restrictions on how often orders for the account of market makers (“Principal Orders”) may be sent through the Linkage.

1. Satisfaction of Trade-Throughs

One of the main goals of the Linkage Plan is to limit the incidence of intermarket trade-throughs. As part of achieving this goal, the Linkage Plan provides that if a customer order is the best-published quote and a trade is executed at a worse price, the exchange representing that customer order may request compensation from the exchange that executed the trade-through.

Currently, the Linkage Plan requires that, to be compensated by another Participant, a Participant generally must lodge a complaint with that Participant within three minutes of the time that the transaction report was disseminated. The Linkage Plan requires that the complaint specify the number of customer contracts at the disseminated quotation that were traded-through. The Participant that traded through is then required to respond to the complaint, either by claiming an exception to liability or by taking corrective action. If no exception to liability applies, the Participant initiating the trade-through may either: (1) Send a Satisfaction Order to the Participant that sent the complaint; or (2) adjust the price of the trade to a price at which a trade-through would not have occurred.

The proposed amendment would simplify this procedure by combining the complaint and satisfaction process. Specifically, if a Participant identifies a trade-through by another exchange, that Participant would send a Satisfaction Order to the exchange that traded-through for the number of customer contracts at the disseminated quotation. The exchange receiving the Satisfaction Order can: (1) Fill the order; (2) claim an exemption from liability; or (3) take other action currently permitted under the Linkage Plan (such as correcting the price of the transaction to a price that would not be a trade-through). Due to the uncertainty as to whether a Participant will receive an execution of the Satisfaction Order, the proposed amendment would permit the Participant that sent the Satisfaction Order to reject any execution it receives if the customer order(s) underlying the Satisfaction Order had been executed or canceled while the Satisfaction Order was pending.

2. Sending Principal Orders Through the Linkage

Currently, the Linkage Plan provides that a market maker may send a Principal Order for automatic execution to another exchange for up to 10 contracts. If a market maker of a Participant sends such a Principal Order for automatic execution to another Participant, there are limits and prohibitions on any market maker from that Participant sending additional Principal Orders to the same exchange in the same options class. Specifically, subject to certain exceptions, a Participant cannot send another Principal Order for automatic execution for 15 seconds, and for the following 45 seconds it can only send Principal Orders larger than the automatic execution size.

The Participants propose to place the responsibility for monitoring compliance with these limitations on the receiving, not the sending, Participant. Specifically, proposed amended Section 7(a)(ii)(C) of the Linkage Plan states that if a Participant received a second Principal Order for automatic execution from a Participant within 15 seconds, it could reject such order. Similarly, for the next 45 seconds, the receiving Participant could deny automatic execution to any Principal Orders it receives from the same Participant. The same exceptions to these provisions contained in the current Linkage Plan would continue to apply.

B. Proposed Joint Amendment No. 3

Proposed Joint Amendment No. 3 would substantively modify the Linkage Plan by: (1) Restricting Participants' withdrawal from the Linkage Plan; (2) incorporating a timetable for implementing the linkage; and (3) requiring each Participant to submit to the Commission a project plan for implementation and monthly status reports.

1. Withdrawal from the Linkage Plan

Currently, a Participant is required to provide only 30 days written notice to the other Participants and the facilities manager to withdraw from the Linkage Plan. The proposed amendment would delete this provision and require, instead, that a Participant wishing to withdraw from the Linkage Plan effect an amendment to the Linkage Plan, which would be subject to Commission approval. The Participant would be required to state how it plans to accomplish, by alternate means, the goals of the Linkage Plan regarding limiting trade-throughs of prices on other exchanges trading the same options classes. A Participant would be permitted to propose such an amendment unilaterally, and approval of the other Participants would not be required.

2. Implementation Timetable

The proposed amendment would incorporate into the Linkage Plan a specific implementation timetable. The Participants propose to implement the linkage in two phases: the first phase would be limited to those aspects of the Linkage Plan providing for automatic execution, and the second phase would implement all other linkage functionality. The proposal would require the Participants to begin full intermarket testing of phase 1 no later than December 1, 2002, and testing of phase 2 no later than March 1, 2003. The Participants would be required to implement phase 1 and phase 2 as soon as practical after successful testing, and no later than February 1, 2003 and April 30, 2003, respectively.

3. Project Plan and Monthly Status Reports

Finally, proposed Joint Amendment No. 3 would require each Participant to provide the Commission with a detailed project plan and monthly status reports regarding implementation of such project plan.

II. Discussion

After careful consideration, the Commission finds that the proposed Joint Amendments to the Linkage Plan are consistent with the requirements of the Act and the rules and regulations thereunder. Specifically, the Commission finds that the proposed Joint Amendments are consistent with section 11A of the Act, and Rule 11Aa3-2 thereunder, in that it is appropriate in the public interest, for the protection of investors and the maintenance of fair and orderly markets, to remove impediments to, and perfect the mechanisms of, a national market system.

The Commission believes that the proposed streamlined procedures for achieving satisfaction of trade-throughs set forth in proposed Joint Amendment No. 2 should enable each Participant to more easily seek compensation on behalf of customer orders represented in the quote in circumstances in which it believes that a trade-through of that quote has occurred. In addition, the proposal to place the responsibility for monitoring the handling of multiple principal orders on the receiving, rather than the sending, Participant should address the Participants' technical concerns regarding implementation of this provision, without modifying the substance or intent of the provision.

The Commission further believes that the proposed restrictions on withdrawal from the Linkage Plan, proposed in Joint Amendment No. 3, will ensure that each of the Participants remains subject to the requirements of the Linkage Plan to avoid trading through better prices displayed on the other options markets, unless the Participant can demonstrate to the Commission's satisfaction that it can accomplish the same goal by an alternate means. Because each Participant would be required to obtain Commission approval before it could withdraw from the Linkage Plan, the Commission is assured of an opportunity to carefully consider the full implications of any such proposed withdrawal from the Linkage Plan.

Moreover, the proposed implementation timetable provides certainty regarding the dates by which an intermarket linkage in the options market will be available. Finally, the submission by the exchanges to the Commission of detailed project plans and monthly status reports will enhance the Commission's ability to continue monitoring the Participants' progress in achieving full implementation of the Linkage Plan within the established timetables.

Accordingly, It is ordered, pursuant to section 11A of the Act, and Rule 11Aa3-2 thereunder, that the proposed Joint Amendments No. 2 and 3 to the Options Intermarket Linkage Plan are approved.