The trustbusters have landed on the options industry.
The nation’s four major options exchanges were censured by the Securities and Exchange Commission on Monday for stifling competition by refusing to list the same stock options on more than one exchange. They were ordered to spend $77 million over the next two years on surveillance and enforcement.
In addition, the Chicago Board Options Exchange and its smaller rivals also agreed to a consent decree with the Justice Department on Monday for allegedly violating antitrust laws, although they did not admit or deny guilt. The other exchanges are the American Stock Exchange, the Pacific Exchange and the Philadelphia Stock Exchange.
Since 1990, the SEC has prohibited the exchanges from maintaining any rule or policy that precludes listing a particular option on more than one exchange. The intent is to benefit investors, in part by narrowing spreads–the difference between the best quoted price to buy and the best quoted price to sell an option.
According to the Justice Department lawsuit, the exchanges flouted that prohibition and reached an understanding to refrain from multiple listings on existing contracts.
That practice left longstanding franchises, such as the CBOE’s IBM options, largely unchallenged. As part of the new consent decree, the exchanges agree not to restrict multiple listings.
“Today, more people than ever are investing in the options market,” Joel Klein, assistant attorney general in charge of the antitrust division, said in a statement. “Investors who choose to buy or sell equity options expect to receive–and are entitled to receive–the full benefits of competition.”
Last year, the informal agreement frayed under pressure from the threat of electronic competitors, and the traditional exchanges began to list more of each other’s options.
The move toward multiple listing gained momentum after Justice Department investigators presented a formal request for information to the CBOE and other exchanges in early 1999. These days, competitive listings are common, and the recent introduction of the all-electronic International Securities Exchange promises to increase the competition.
SEC officials say Monday’s agreement is meant to ensure that the multiple listings continue.
“The result will be enhanced infrastructure for competition and fairer markets for those investing in options,” SEC Chairman Arthur Levitt said in a statement.
As stock market volume has exploded in recent years, so has interest in options: According to the Chicago-based Options Clearing Corp., the number of options contracts traded has risen from 287 million in 1995 to 508 million in 1999, in part because of multiple listings.
Critics say the government should have acted on the issue sooner.
“The SEC should have been involved in this in the `80s,” said Paul Foster, an options market strategist with 1010wallstreet.com in Chicago. “Now it’s filing suits saying that their own exchanges didn’t open up their markets. Why didn’t the SEC force them 20 years ago to dual list?”
In a statement, the CBOE said it is settling with the Justice Department “to avoid significant cost and disruption to the exchange.” It also announced that it has reached an agreement in principle with plaintiffs to resolve a private class-action lawsuit concerning similar listing issues.
Previously, the industry had claimed that the deliberate lack of competition had a rational basis: If every exchange listed each other’s options, systems would be severely taxed. In addition, fragmenting the markets could make it difficult for investors to always obtain the best price, the industry said.
Regulators say closer scrutiny of the markets will prevent those problems from developing.
As part of its agreement with the SEC, the CBOE must spend $17 million a year in 2000 and 2001 on surveillance systems and staffing, investigation and enforcement. That represents an increase of roughly 50 percent over the exchange’s past expenditures in those areas, SEC officials said.
The other three options exchanges also are raising their expenditures for surveillance, investigation and enforcement by about 50 percent in 2000 and 2001, the SEC said. The American Stock Exchange will spend $11 million a year, the Pacific Exchange will spend $6.5 million a year, and the Philadelphia Stock Exchange will spend $4 million a year.
