U-S government sues options exchanges

At the same time, the four exchanges – the American Stock Exchange, part of the Nasdaq Stock Market; the Chicago Board Options Exchange; the Pacific Exchange; and the Philadelphia Stock Exchange – agreed to be censured by the Securities and Exchange Commission for allegedly failing to adequately enforce traders' compliance with their own rules.

Without admitting to or denying wrongdoing, they also agreed to spend $77 million on market surveillance and enforcement.

In addition, the four exchanges agreed to a consent decree in the Justice Department's civil antitrust lawsuit that, if approved by a federal judge in Washington, would resolve the suit.

Under the consent decree, the exchanges would be prohibited from continuing their options listing agreement and from harassing exchanges that seek to list options already listed on another exchange.

The Justice Department and the SEC have been investigating the alleged improprieties at the options exchanges since last year. Options give holders the right to buy or sell stocks at a fixed prices within a certain period.

Critics maintain that by not allowing for multiple listing of options, the exchanges are preventing customers from getting the best possible prices.

The SEC has previously said that competition among exchanges for options would benefit investors by narrowing the spreads, the differences between the quoted price to buy an option and the quoted price to sell one.

"Today more people than ever are investing in the options market,'' Joel Klein, the assistant attorney general who heads the department's Antitrust Division, said in a statement. "Investors ... expect to receive – and are entitled to receive – the full benefits of competition.''

According to the Chicago-based Options Clearing Corp., the number of options contracts traded has surged from 287 million in 1995 to 508 million in 1999.

In a statement, the American Stock Exchange said it was pleased that the matter had been resolved, saying it believes that "these settlements are fully consistent with its mission to continue to provide options investors with fair, competitive and healthy markets.''

SEC rules prohibit the exchanges from maintaining any rule or policy that precludes multiple listing of options.

According to the Justice Department suit, the four exchanges flouted the SEC rules and reached an understanding among themselves in the early 1990s to refrain from multiple listings.

As a result, the suit alleges, many frequently traded stock options were traded on only one exchange from the early 1990s until at least the summer of 1999.

The suit also alleges that the exchanges enforced their improper agreement by threatening and harassing exchanges and traders that wanted multiple listings of options.

Under the agreement with the SEC, the American Stock Exchange will spend $22 million in the rest of this year and next year on surveillance and enforcement; the Chicago Board Options Exchange will spend $34 million; the Pacific Exchange, $13 million; and the Philadelphia Stock Exchange, $8 million.

The exchanges also agreed to design an audit trail system to help them conduct more effective monitoring of the markets, traders and customer order handling. And they agreed to tighten penalties for violations of exchange rules governing handling of orders.