"Exclusive listings are a tremendous disservice to public investors. They are anti-competitive and antithetical to the principles of the National Market System," said PCX Chairman and CEO Philip D. DeFeo. "The benefits of multiply trading options products are broad and irrefutable - tighter spreads, no transaction fees for customers, and greater liquidity. There is no justification to expand the antiquated practice of exclusive listings. Indeed, there is every reason for the SEC to bring it to a close, and end the monopoly profits that are costing investors and the industry millions of dollars. Unlike others, we support competition in the options markets."
The PCX is seeking a moratorium on additional exclusive listings to prevent exchanges from "front-running" new SEC rules, by signing exclusive agreements prior to Commission action on the ISE petition. "We do not want to see a bad situation made worse before the SEC acts on the ISE's request," said DeFeo.
The text of the PCX letter to the SEC follows:
September 2, 2003
Ms. Annette L. Nazareth Re: Multiple Trading of Certain Index Products Dear Ms. Nazareth: The International Securities Exchange ("ISE") has petitioned the Commission to engage in rulemaking to prohibit an options exchange from being a party to an exclusive or preferential licensing agreement with respect to index options and options overlying other instruments whose value is based on an index (1). The Pacific Exchange, Inc. ("PCX") fully supports the ISE petition and completely agrees with its analysis underlying the Petition. Briefly, we believe the beneficial effects of multiple trading of index products would be enormous, and most of these benefits would go to customers in terms of lower transaction costs for these products. Not only do customers pay directly for access to exclusively listed options product (which they do not for multiply listed products), but they also pay indirectly in the form of the higher transaction costs, such as spreads in markets that are not fully competitive. For these reasons, we encourage the Commission to publish for comment the rule described in the ISE Petition. We are concerned, however, that the publication by the Commission of such a rulemaking proposal would encourage index licensers and certain options markets to rush to enter into exclusive licenses, before the Commission could adopt any limit on exclusive licenses. Indeed, we have seen some evidence that the very filing of the Petition, which is a public document, may have had this effect. For example, we were recently informed by the Nasdaq Stock Market, Inc., ("Nasdaq") that it is unwilling to enter into a licensing agreement with the PCX with respect to two separate options products relating to an index, because Nasdaq may have entered into an exclusive agreement with another market with respect to such options. Any such "race to the bottom" would exacerbate the negative effects of the restraints on competition, including especially higher transaction costs for customers, that exclusive deals represent, and could significantly reduce the effectiveness of any rulemaking the Commission might eventually decide to undertake in this area. As the Commission knows from its multiple listings initiatives with respect to individual stock options, exclusive listings encourage anticompetitive behavior, the effects of which extend beyond the product exclusively listed. Specifically, exclusive listings lead to hidden order routing biases on the part of order entry firms, who tend to route order flow even in products not exclusively listed to a market with an exclusive listing in products that become heavily traded. Like the ISE and the Commission, the PCX supports clarity with respect to the factors that motivate order flow decisions, and exclusive listings lead to the same kind of obfuscation of an agent's order routing decisions as does payment for order flow. For these reasons, we encourage the Commission immediately to order a temporary moratorium on the commencement of trading of options products subject to exclusive licensing arrangements. Such a temporary moratorium would not affect the markets for any products currently traded; would not affect the validity of any exclusive listing agreements already entered; and would be limited to preventing index products subject to exclusive licenses but not yet actually trading from being introduced into the market and, therefore, further spreading the negative effects to customers of non-competitive trading of index options products, until the Commission can make a determination on the ISE Petition. Should the Commission determine not to publish the ISE proposal for notice and comment, or even as a concept release, the Commission could, at that time, lift the moratorium. Of course, should the Commission determine to publish the Petition, in the form either of a concept release or a notice of proposed rule making, we also would encourage the Commission to continue any such moratorium in effect during the notice and comment period and prior to any Commission action on the Petition. We appreciate the Commission's continuing focus on obtaining the benefits to customers of competition among markets, and hope that you will view the suggestion contained in this letter as consistent with your efforts in this area. Sincerely, Philip D. DeFeo PDD/AA:cy cc: The Honorable William H. Donaldson
Director, Division of Market Regulation
Chairman and Chief Executive Officer
The Honorable Paul S. Atkins
The Honorable Roel C. Campos
The Honorable Cynthia A. Glassman
The Honorable Harvey J. Goldschmid
The Honorable Richard Baker
The Honorable Barbara Boxer
The Honorable Christopher J. Dodd
The Honorable Michael B. Enzi
The Honorable Dianne Feinstein
The Honorable Barney Frank
The Honorable Paul E. Kanjorski
The Honorable Michael G. Oxley
The Honorable Nancy Pelosi
The Honorable Paul S. Sarbanes
The Honorable Richard C. Shelby
Jonathan G. Katz
William J. Brodsky - Chicago Board Options Exchange
Meyer S. Frucher - Philadelphia Stock Exchange
Salvatore F. Sodano - American Stock Exchange
David Krell - International Securities Exchange, Inc
