America's options exchanges need a safe house for their top dogs to meet, so the
Securities and Exchange Commission
is going to provide one.
SEC chieftain Arthur Levitt is expected to summon the heads of the four U.S. options exchanges to an informal "summit" soon to hash out issues exchange officials have been leery of discussing among themselves because of an ongoing
investigation, according to two people familiar with the planned meeting.
The date and the specific agenda haven't been finalized, but the issues are likely to include a linkage system and the June 2000 stock quote decimalization deadline. The linkage system involves connecting the four exchanges, enabling firms to route orders to the best-priced market.
Top officials from the
American Stock Exchange
Chicago Board Options Exchange
Philadelphia Stock Exchange
are expected to convene in Washington, D.C., as soon as July.
The Amex, Pacific Exchange and Philly declined to comment. The CBOE didn't return a call. An SEC spokesman wouldn't comment on any upcoming meetings.
The meeting may be necessary because options exchanges would be hardest hit by upcoming changes in the pricing of securities, especially if price differences narrow to a penny as a result of the decimalization mandated for June 30, 2000.
But exchange officials are hamstrung from brainstorming together on new technology and other structural obstacles by the ongoing Justice investigation into alleged antitrust violations. Afraid any get-together would be seen as collusion, options officials have been reluctant to even meet in the same room. The Justice investigation into competitive pricing among exchanges has not only worried the industry but has also played a role in the April collapse of the CBOE and Pacific Exchange merger.
"It makes it very, very difficult to achieve any industrywide consensus or systemwide coordination," one SEC official was quoted as saying in a recent press report.
An industrywide meeting on decimalization about two weeks ago raised several issues that the SEC wants to address, primarily the capacity to handle increased quote traffic as decimal pricing creates more quotes. "There were some grave concerns raised at the meeting about the impact, especially on options exchanges," says one options exchange official.
Because under a decimalization plan stocks will trade in smaller increments and, as a result, likely generate more quotes in between current parameters, technology concerns around the issue have been persistent. In the options world, the problem is excerbated because for every change in the underlying share price, the premiums across the entire options string are subject to change.
Levitt apparently realized this bottleneck could prevent him and his agency from moving ahead on decimalization, and might even force the agency to approach Congress for funding, rather than rely solely on the securities industry to come up with a solution.
It's that kind of pressure that makes the SEC willing to sit among the four exchanges to discuss possible plans. "Their antitrust lawyers were saying 'You can't meet' as defensive medicine. But they can do so now under the SEC's umbrella, and frankly, even if there wasn't this
Justice investigation going on, this would be appropriate," says one person at the SEC who asked not to be identified.
"Of course, all of these things won't be resolved in one session," says the options exchange official. "It has to be ongoing. If and when we go to decimals and possibly penny increments, the projection is our systems will have to be able to handle 75,000 messages per second," as compared to the 1,600 quotes per second that most exchanges are capable of generating. "There's no system on the face of God's earth that can handle that now."