
[Federal Register: August 6, 2009 (Volume 74, Number 150)]
[Notices]               
[Page 39362-39371]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr06au09-98]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-60405; File No. 4-546]

 
 Joint Industry Plan; Order Approving the National Market System 
Plan Relating to Options Order Protection and Locked/Crossed Markets 
Submitted by the Chicago Board Options Exchange, Incorporated, 
International Securities Exchange, LLC, The NASDAQ Stock Market LLC, 
NASDAQ OMX BX, Inc., NASDAQ OMX PHLX, Inc., NYSE Amex LLC, and NYSE 
Arca, Inc.

July 30, 2009.

I. Introduction

    The proposed Options Order Protection and Locked/Crossed Market 
Plan (``Proposed Plan'') was filed jointly, pursuant to Rule 608 of 
Regulation NMS under the Securities Exchange Act of 1934 (``Act'') 
(``Regulation NMS'') (``Rule 608''),\1\ by the International Securities 
Exchange, LLC (``ISE'') and NYSE Arca, Inc. (``NYSE Arca'') on 
September 13, 2007 and September 18, 2007, respectively, with the 
Securities and Exchange Commission (``Commission'').\2\ On December 11, 
2007, ISE and NYSE Arca separately filed Amendment No. 1 to the 
Proposed Plan.\3\ On April 24, 2008, and April 17, 2008, ISE and NYSE 
Arca, respectively, filed Amendment No. 2 to the Proposed Plan.\4\ On 
November 10,

[[Page 39363]]

2008 and October 31, 2008, ISE and NYSE Arca, respectively, filed 
Amendment No. 3 to the Proposed Plan.\5\ On April 30, 2008, May 8, 
2008, June 18, 2008, June 18, 2008, and July 9, 2008, respectively, 
Chicago Board Options Exchange, Incorporated (``CBOE''), The NASDAQ 
Stock Market LLC (``Nasdaq''), American Stock Exchange LLC (``Amex'') 
(f/k/a NYSE Alternext US LLC, ``NYSE Alternext,'' n/k/a NYSE Amex LLC, 
``NYSE Amex''), Philadelphia Stock Exchange, Incorporated (n/k/a NASDAQ 
OMX PHLX, Inc., ``Phlx''), and Boston Stock Exchange, Inc. (``BSE'') 
(n/k/a NASDAQ OMX BX, Inc., ``BX'' and together with ISE, NYSE Arca, 
CBOE, Nasdaq, Amex, and Phlx, the ``Proposing Exchanges'') filed with 
the Commission the Proposed Plan.\6\ On November 25, 2008, November 26, 
2008, December 2, 2008, December 4, 2008, and December 5, 2008, CBOE, 
NYSE Alternext, BSE, Phlx, and Nasdaq, respectively, filed Amendment 
No. 1 to the Proposed Plan.\7\ On April 2, 2009, a detailed summary of 
the Proposed Plan was published for comment in the Federal Register.\8\
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    \1\ 17 CFR 242.608.
    \2\ See letter from Michael J. Simon, General Counsel, ISE, to 
Nancy M. Morris, Secretary, Commission, dated September 12, 2007 
(``ISE Letter 1''); and letter from Peter G. Armstrong, Managing 
Director, Options, NYSE Arca, to Nancy M. Morris, Secretary, 
Commission, dated September 14, 2007 (``NYSE Arca Letter 1'').
    \3\ See letter from Michael J. Simon, General Counsel, ISE, to 
Nancy M. Morris, Secretary, Commission, dated December 10, 2007; and 
letter from Peter G. Armstrong, Managing Director, Options, NYSE 
Arca, to Nancy M. Morris, Secretary, Commission, dated December 10, 
2007.
    \4\ Amendment No. 2 superseded Amendment No. 1 and replaced it 
in its entirety. See letter from Michael J. Simon, General Counsel, 
ISE, to Nancy M. Morris, Secretary, Commission, dated April 16, 
2008; and letter from Peter G. Armstrong, Managing Director, 
Options, NYSE Arca, to Nancy M. Morris, Secretary, Commission, dated 
April 16, 2008.
    \5\ See letter from Michael J. Simon, General Counsel, ISE, to 
Florence Harmon, Acting Secretary, Commission, dated November 7, 
2008 (``ISE Letter 2''); and letter from Peter G. Armstrong, 
Managing Director, Options, NYSE Arca, to Florence Harmon, Acting 
Secretary, Commission, dated October 30, 2008 (``NYSE Arca Letter 
2'').
    \6\ In their respective filings of the Proposed Plan, Amex, BSE, 
CBOE, Nasdaq, and Phlx incorporated the changes made by ISE and NYSE 
Arca in Amendment No. 2. See letters from Jeffrey P. Burns, Vice 
President and Associate General Counsel, Amex, to Nancy M. Morris, 
Secretary, Commission, dated June 17, 2008 (``Amex Letter 1''); 
Bruce Goodhue, Chief Regulatory Officer, BSE, to Florence Harmon, 
Acting Secretary, Commission, dated July 8, 2008 (``BSE Letter 1''); 
Edward J. Joyce, President and Chief Operating Officer, CBOE, to 
Nancy M. Morris, Secretary, Commission, dated April 29, 2008 (``CBOE 
Letter 1''); Jeffrey S. Davis, Vice President and Deputy General 
Counsel, The NASDAQ OMX Group, Inc., to Nancy M. Morris, Secretary, 
Commission, dated May 7, 2008 (``Nasdaq Letter 1''); and Richard S. 
Rudolph, Vice President and Counsel, Phlx, to Nancy M. Morris, 
Secretary, Commission, dated June 17, 2008 (``Phlx Letter 1'').
    \7\ In their respective Amendment No. 1 to the Proposed Plan, 
BSE, CBOE, NYSE Alternext, Phlx, and Nasdaq made changes identical 
to those made by ISE and NYSE Arca in Amendment No. 3. See letters 
from Edward J. Joyce, President and Chief Operating Officer, CBOE, 
to Florence Harmon, Acting Secretary, Commission, dated November 25, 
2008 (``CBOE Letter 2''); Jeffrey P. Burns, Managing Director, NYSE 
Alternext, to Florence Harmon, Acting Secretary, Commission, dated 
November 25, 2008 (``Amex Letter 2''); John Katovich, Vice 
President, BSE, to Florence Harmon, Acting Secretary, Commission, 
dated December 1, 2008 (``BSE Letter 2''); Richard S. Rudolph, Vice 
President and Counsel, Phlx, to Florence Harmon, Acting Secretary, 
Commission, dated December 3, 2008 (``Phlx Letter 2''); and Jeffrey 
S. Davis, Vice President and Deputy General Counsel, The NASDAQ OMX 
Group, Inc., to Florence Harmon, Acting Secretary, Commission, dated 
December 4, 2008 (``Nasdaq Letter 2'').
    \8\ Securities Exchange Act Release No. 59647 (March 30, 2009), 
74 FR 15010 (File No. 4-546) (``Proposed Plan Notice''). The full 
text of the Proposed Plan submitted by the Proposing Exchanges, is 
available on the Commission's Web site at http://sec.gov/rules/sro/
nms/nmsarchive/nms2007.shtml#4-546, at each Proposing Exchange, and 
at the Commission's Public Reference Room.
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    The Commission received one comment on the Proposed Plan.\9\
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    \9\ Letter from John C. Nagel, Managing Director & Deputy 
General Counsel, Citadel Investment Group L.L.C. (``Citadel'') to 
Nancy M. Morris, Secretary, Commission, dated July 18, 2008 
(``Citadel Letter''). The Citadel Letter cited to Citadel's comments 
made in a letter from John C. Nagel, Managing Director & Deputy 
General Counsel, Citadel to Nancy M. Morris, Secretary, Commission, 
dated July 15, 2008 (Petition for Rulemaking to Address Excessive 
Access Fees in the Options Markets) (``Petition for Rulemaking'').
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    This order approves the Proposed Plan, with changes as the 
Commission deems necessary or appropriate, thus authorizing CBOE, ISE, 
Nasdaq, BX, Phlx, Amex, and NYSE Arca to act jointly to implement the 
Proposed Plan, as modified herein, as a means of facilitating a 
national market system in accordance with the requirements of Section 
11A of the Act.\10\
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    \10\ 15 U.S.C. 78k-1. See also 17 CFR 242.608(b)(2). The 
approved Options Order Protection and Locked/Crossed Market Plan, 
which incorporates the changes the Commissions deems necessary or 
appropriate, is attached here as Appendix A and is referred to 
herein as the ``Options Linkage Plan.''
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II. Background

A. Section 11A of the Act

    In 1975, Congress directed the Commission, through the enactment of 
Section 11A of the Act,\11\ to facilitate the establishment of a 
national market system to link together the individual markets that 
trade securities. Congress found the development of a national market 
system to be in the public interest and appropriate for the protection 
of investors and the maintenance of fair and orderly markets to assure 
fair competition among the exchange markets.\12\ Section 11A(a)(3)(B) 
of the Act directs the Commission, ``by rule or order, to authorize or 
require self-regulatory organizations to act jointly with respect to 
matters as to which they share authority under this title in planning, 
developing, operating, or regulating a national market system (or a 
subsystem thereof) or one or more facilities.'' \13\ The Commission's 
approval of a national market system plan is conditioned upon a finding 
that the proposed plan is ``necessary or 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 
mechanism of, a national market system, or otherwise in furtherance of 
the purposes of the Act.'' \14\
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    \11\ 15 U.S.C. 78k-1.
    \12\ 15 U.S.C. 78k-1(a)(1)(C).
    \13\ 15 U.S.C. 78k-1(a)(3)(B).
    \14\ 17 CFR 242.608(b)(2).
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B. Current Plan

    Currently, the Proposing Exchanges are signatories to the Plan for 
the Purpose of Creating and Operating an Intermarket Option Linkage 
(``Current Plan''). The Current Plan is a national market system plan 
linking its participants. The Commission approved the Current Plan on 
July 28, 2000.\15\ Subsequently, both Pacific Exchange, Inc. (n/k/a 
``NYSE Arca'') and Phlx submitted proposed amendments to the Current 
Plan to become participants to the Current Plan. These proposed 
amendments were approved on November 16, 2000.\16\ On February 5, 2004, 
BSE's proposed amendment to become a participant to the Current Plan 
became effective.\17\ Further, Nasdaq's proposed amendment to become a 
participant to the Current Plan became effective on March 21, 2008.\18\
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    \15\ See Securities Exchange Act Release No. 43086 (July 28, 
2000), 65 FR 48023 (August 4, 2000) (File No. 4-429).
    \16\ See Securities Exchange Act Release Nos. 43573 (November 
16, 2000), 65 FR 70851 (November 28, 2000) (File No. 4-429) and 
43574 (November 16, 2000), 65 FR 70850 (November 28, 2000) (File No. 
4-429).
    \17\ See Securities Exchange Act Release No. 49198 (February 5, 
2004), 69 FR 7029 (February 12, 2004) (File No. 4-429).
    \18\ See Securities Exchange Act Release No. 57545 (March 21, 
2008), 73 FR 16394 (March 27, 2008) (File No. 4-429).
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    The Current Plan requires its participants to avoid, absent 
reasonable justification and during normal market conditions, trading 
at a price inferior to that displayed on another market (``trade-
through'').\19\ The Current Plan provides for several exceptions to 
trade-through liability, including, among other things, systems 
malfunction, failure of the receiving market to respond to an incoming 
order within 30 seconds, failure of the market traded through to 
complain within the specified time period, complex trades, trading 
rotations, and non-firm quotations on the market that was traded 
through.\20\ The Current Plan also provides a mechanism by which a 
member of a participating exchange

[[Page 39364]]

could seek satisfaction if a customer order is traded through.\21\
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    \19\ Section 8(c) of the Current Plan.
    \20\ Section 8(c)(iii) of the Current Plan.
    \21\ Section 8(c)(ii) of the Current Plan.
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    Under the Current Plan, its participants agree that the 
dissemination of ``locked'' or ``crossed'' markets should be avoided, 
and, if their members lock or cross a market, they should take remedial 
actions to unlock or uncross such market.\22\ Further, the Current Plan 
contains provisions to address trade comparison, clearing, trading 
halts, non-firm quotations, and administration of the Current Plan.\23\ 
Except with respect to the addition of new participants and the 
withdrawal of current participants, any proposed change to the Current 
Plan must be approved unanimously by its participants.\24\
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    \22\ Section 7(a)(i)(C) of the Current Plan.
    \23\ Sections 5, 9, and 10 of the Current Plan.
    \24\ Section 5(c)(i) of the Current Plan.
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    The participating exchanges comply with the requirements of the 
Current Plan, including the prohibition against trade-throughs, by 
utilizing a stand alone system (``Linkage Hub'') to send and receive 
specific order types. The Linkage Hub is a centralized data 
communications network that electronically links the options exchanges 
to one another. The Options Clearing Corporation (``OCC'') operates the 
Linkage Hub.\25\
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    \25\ See ISE Letter 2 and NYSE Arca Letter 2, supra note 5; see 
also Amex Letter 2, BSE Letter 2, CBOE Letter 2, Nasdaq Letter 2, 
and Phlx Letter 2, supra note 7.
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    There are three defined order types under the Current Plan that its 
participants could route through the Linkage Hub to limit trade-
throughs: orders represented by eligible market makers on behalf of 
customers (``Principal Acting as Agent Orders'' or ``P/A Orders''); 
\26\ orders for the principal accounts of market makers and specialists 
(``Principal Orders''); \27\ and orders intended to satisfy trade-
through liabilities (``Satisfaction Orders'').\28\ Non-market-maker 
broker-dealers do not have access to the Linkage Hub.
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    \26\ Sections 2(16)(a) and 7(a)(ii)(A), (B) of the Current Plan.
    \27\ Sections 2(16)(b) and 7(a)(ii)(C) of the Current Plan.
    \28\ Sections 2(16)(c) and 7(a)(ii)(D) of the Current Plan.
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C. Proposed Plan

    The Proposing Exchanges are now seeking approval of an alternative 
linkage plan, the Proposed Plan. As described in more detail below, the 
Proposed Plan would not require a central linkage mechanism akin to the 
Current Plan's Linkage Hub, and would introduce certain new features to 
linkages between options markets, including an Intermarket Sweep Order 
(``ISO'') similar to that available for NMS stocks under Regulation 
NMS.\29\
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    \29\ See Securities Exchange Act Release No. 51808 (June 9, 
2005), 70 FR 37496 (June 29, 2005) (File No. S7-10-04) (``NMS 
Release''); 17 CFR 242.600 et seq.
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III. Discussion

    As discussed above, in 1975, Congress directed the Commission, 
through the enactment of Section 11A of the Act,\30\ to facilitate the 
development of a national market system consistent with the objectives 
of the Act. In particular, Section 11A(a)(3)(B) of the Act \31\ 
authorizes the Commission ``by rule or order, to authorize or require 
self-regulatory organizations to act jointly with respect to matters as 
to which they share authority under this title in planning, developing, 
operating, or regulating a national market system (or a subsystem 
thereof) or one or more facilities.'' Rule 608 establishes the 
procedures for filing, amending, and approving a national market system 
plan. Approval of such a plan is conditioned upon a finding that the 
proposed plan ``is necessary or 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, or otherwise in furtherance of the purposes of 
the Act.'' \32\
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    \30\ 15 U.S.C. 78k-1.
    \31\ 15 U.S.C. 78k-1(a)(3)(B).
    \32\ 17 CFR 242.608.
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    After careful review, the Commission has determined to approve the 
Proposed Plan, pursuant to Section 11A(a)(3)(B) of the Act \33\ and 
Rule 608 thereunder,\34\ with changes set forth herein as the 
Commission has deemed necessary and appropriate.\35\ Specifically, the 
Commission finds that changes to the Proposed Plan set forth herein are 
necessary and appropriate in the public interest. The Commission 
further finds that the Options Linkage Plan is in furtherance of the 
purposes of the Act in that it requires the protection of the best 
priced displayed quotes and avoidance and reconciliation of locked and 
crossed markets, and thus is necessary and 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.\36\
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    \33\ 15 U.S.C. 78k-1(a)(3)(B).
    \34\ 17 CFR 242.608.
    \35\ The Commission has modified the Proposed Plan to amend 
Section 7 of the Proposed Plan relating to the implementation date 
of the plan (see infra notes 140-143 and accompanying text).
    \36\ 17 CFR 242.608(b)(2).
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    The Commission believes that Proposed Plan's decentralized 
structure will allow the Proposing Exchanges to take advantage of new 
technology that allow for efficient routing and executions. The 
Proposed Plan will give the Proposing Exchanges greater flexibility for 
order handling as it would allow the exchanges to utilize private 
linkages, instead of requiring each Proposing Exchange to connect to, 
and participate in the maintenance of, a centralized hub. In addition, 
the Proposed Plan would permit the use of ISOs in the options markets. 
As such, the Proposed Plan would allow the Proposing Exchanges to move 
towards the market structure approved by the Commission for NMS stocks 
under Regulation NMS.\37\ The Commission believes that the Options 
Linkage Plan will allow the Proposing Exchanges to update the way in 
which they accomplish effective quote protection and locked and crossed 
market reconciliation. For the reasons described above, the Commission 
believes that these provisions of the Options Linkage Plan will provide 
benefits to the options markets, including the Proposing Exchanges and 
market participants generally.
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    \37\ See supra note 29.
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    In its comment letter on the Proposed Plan, Citadel referenced the 
comments it made with regard to access fees in the options markets in 
its Petition for Rulemaking.\38\ There, Citadel encouraged the 
Commission to institute a rulemaking proceeding to limit the fees that 
options exchanges may charge non-members to obtain access to 
quotations.\39\ Commission staff is currently considering Citadel's 
petition.
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    \38\ See Citadel Letter, supra note 9.
    \39\ See Petition for Rulemaking, supra note 9.
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A. Order Protection

1. Requirement of Reasonable Policies and Procedures
    The Options Linkage Plan requires each Participant \40\ to 
establish,

[[Page 39365]]

maintain, and enforce written policies and procedures as approved by 
the Commission that are reasonably designed to prevent Trade-Throughs 
in that Participant's market in Eligible Options Classes.\41\ A 
``Trade-Through'' \42\ is defined as a transaction in an option series, 
either as principal or agent, at a price that is lower than a Protected 
Bid or higher than a Protected Offer. A ``Protected Bid'' or a 
``Protected Offer'' \43\ means a bid or offer in an option series that 
is displayed by an Eligible Exchange, is disseminated pursuant to the 
OPRA Plan, and is the Best Bid or Best Offer of an Eligible Exchange. A 
``Best Bid'' or ``Best Offer'' \44\ means the highest bid price or the 
lowest offer price communicated by a member of an Eligible Exchange to 
any broker-dealer or to any customer at which such member is willing to 
buy or sell, either as principal or agent.
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    \40\ The Options Linkage Plan defines ``Participant'' to mean an 
Eligible Exchange whose participation in the plan has become 
effective pursuant to Section 3(c) of the Options Linkage Plan. See 
Section 2(15) of the Options Linkage Plan. The Options Linkage Plan 
defines ``Eligible Exchange'' to mean a national securities exchange 
registered with the Commission in accordance with Section 6(a) of 
the Act that, among other things, is a Participant Exchange in OCC 
(as that term is defined in Section VII of the OCC by-laws) and is a 
party to the OPRA Plan (as that term is described in Section I of 
the OPRA Plan). ``OPRA Plan'' means the plan filed by the Options 
Price Reporting Authority with the Commission pursuant to Section 
11A(a)(1)(C)(iii) of the Act and approved by the Commission and 
declared effective as of January 22, 1976, as from time to time 
amended. See Section 2(14) of the Options Linkage Plan. For the 
definitions of ``Trade-Through,'' ``Best Bid'' or ``Best Offer,'' 
``Locked Market,'' and ``Crossed Market,'' see infra notes 42, 44, 
and 119 and accompanying texts.
    \41\ Section 5(a)(i) of the Options Linkage Plan.
    \42\ Section 2(21) of the Options Linkage Plan.
    \43\ Section 2(17) of the Options Linkage Plan. Protected Bid 
and Protected Offer, together are referred to herein as ``Protected 
Quotation.'' See Section 2(18) of the Options Linkage Plan.
    \44\ Sections 2(1) and 2(2) of the Options Linkage Plan.
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    The Options Linkage Plan also requires each Participant to agree to 
conduct surveillance of its market on a regular basis to ascertain the 
effectiveness of the policies and procedures to prevent Trade-Throughs 
and to take prompt action to remedy deficiencies in such policies and 
procedures.\45\
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    \45\ Section 5(a)(ii) of the Options Linkage Plan.
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    As is the case currently for NMS stocks under Regulation NMS,\46\ 
the Commission believes the Options Linkage Plan's policies and 
procedures-based approach to preventing Trade-Throughs in options is in 
the public interest, appropriate for the protection of investors and 
the maintenance of fair and orderly markets, and is consistent with 
Section 11A(a)(1)(C) of the Act.\47\ The requirement in Section 5(a)(i) 
of the Options Linkage Plan is virtually identical to the requirement 
in Rule 611(a) of Regulation NMS. The Commission expects the 
Participants in the Options Linkage Plan will establish, maintain, and 
enforce written policies and procedures comparable to those 
established, maintained and enforced by the market centers subject to 
Rule 611(a). The Commission believes that a policies and procedures-
based approach to preventing Trade-Throughs in options is reasonable 
given the increasingly high volume of trading in options, and the 
latencies and other discrepancies in the delivery and receipt of 
quotation data. The requirement of written policies and procedures, as 
well as the responsibility assigned to Participants to regularly 
surveil to ascertain the effectiveness of their procedures and take 
prompt remedial steps, is designed to achieve the objective of 
eliminating all Trade-Throughs that reasonably can be prevented, while 
also recognizing the inherent difficulties of eliminating Trade-Through 
transactions that, despite a Participant's reasonable efforts, may 
occur.
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    \46\ See Rule 611(a) of Regulation NMS (17 CFR 242.611(a)).
    \47\ 15 U.S.C. 78k-1(a)(1)(C).
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    The Commission believes that each Participant's policies and 
procedures must enable it to monitor, on a real-time basis, the 
Protected Quotations displayed by Eligible Exchanges so as to determine 
the prices at which the Participant can and cannot execute trades. In 
addition, the Commission believes that a Participant's policies and 
procedures must establish objective standards and parameters governing 
its use of the exceptions set forth in Section 5(b) of the Options 
Linkage Plan, discussed below, and expects each Participant's order-
handling and trading systems to be programmed in accordance with these 
policies and procedures. Finally, the Participant must take such steps 
as are necessary to enable it to enforce its policies and procedures 
effectively. For example, the Commission believes that Participants 
will need to establish procedures such as regular exception reports to 
evaluate their trading and order-routing practices. The Commission 
believes that each Participant Exchange will need to examine such 
reports to affirm that its policies and procedures have been followed 
by its personnel and properly coded into its systems and, if not, to 
promptly identify the reasons and take remedial action.\48\
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    \48\ See NMS Release at 37535, supra note 29.
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    Participants' obligations under the Options Linkage Plan to 
maintain and enforce policies and procedures reasonably designed to 
prevent Trade-Throughs is reinforced by the Options Linkage Plan's 
explicit assignment of responsibility to Participants to surveil to 
ascertain the effectiveness of their policies and procedures. 
Participants cannot merely establish policies and procedures that may 
be reasonable when created and assume that such policies and procedures 
continue to satisfy the requirements of the Options Linkage Plan. 
Rather, the Commission believes that Participants must regularly assess 
the continuing effectiveness of their procedures and take prompt action 
when needed to remedy deficiencies. In particular, Participants must 
engage in regular surveillance to determine whether Trade-Throughs are 
occurring without an applicable exception and whether they have failed 
to implement and maintain policies and procedures that would have 
reasonably prevented such Trade-Throughs. Further, this requirement is 
an important element of a Participant's obligations under Rule 608(c) 
of Regulation NMS, which require that each self-regulatory 
organization, absent reasonable justification or excuse, enforce 
compliance with any national market system plan by its members and 
persons associated with its members.\49\
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    \49\ 17 CFR 242.608(c).
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2. Exceptions to Trade-Throughs
    The Options Linkage Plan provides exceptions for certain 
transactions from the prohibition against Trade-Throughs.\50\ The 
Options Linkage Plan also provides that, if a Participant relies on an 
exception, it would be required to establish, maintain, and enforce 
written policies and procedures reasonably designed to assure 
compliance with the terms of the exception.\51\ Except for the proposed 
exception for stopped orders and price improvement,\52\ the exceptions 
in the Options Linkage Plan correspond to trade-through exceptions 
found in either the Current Plan or in Regulation NMS.\53\ The Options 
Linkage Plan includes the following exceptions from the prohibition 
against Trade-Throughs: system issues; \54\ trading rotations; \55\ 
crossed markets; \56\ intermarket sweep orders; \57\ quote flickering; 
\58\ non-firm quotes; \59\ complex trades; \60\ customer stopped 
orders; \61\ stopped orders and price

[[Page 39366]]

improvement; \62\ and benchmark trades.\63\
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    \50\ See Proposed Plan Notice at 15012, supra note 8, for a more 
detailed description of the proposed Trade-Through exceptions.
    \51\ Section 5(a)(i) of the Options Linkage Plan.
    \52\ Section 5(b)(x) of the Options Linkage Plan.
    \53\ Rule 611 of Regulation NMS, known also as the Order 
Protection Rule, governs trade-through liability for NMS Stocks. See 
17 CFR 242.611.
    \54\ Section 5(b)(i) of the Options Linkage Plan.
    \55\ Section 5(b)(ii) of the Options Linkage Plan.
    \56\ Section 5(b)(iii) of the Options Linkage Plan. For the 
definition of a ``Crossed Market,'' see infra note 119 and 
accompanying text.
    \57\ Section 5(b)(iv)-(v) of the Options Linkage Plan.
    \58\ Section 5(b)(vi) of the Options Linkage Plan.
    \59\ Section 5(b)(vii) of the Options Linkage Plan.
    \60\ Section 5(b)(viii) of the Options Linkage Plan.
    \61\ Section 5(b)(ix) of the Options Linkage Plan.
    \62\ Section 5(b)(x) of the Options Linkage Plan.
    \63\ Section 5(b)(xi) of the Options Linkage Plan.
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    The Commission believes these exceptions will permit a workable 
intermarket price protection structure for the options market, and are 
consistent with the principle of price protection. As discussed below, 
the Commission finds that each of these exceptions is in the public 
interest, appropriate for the protection of investors and the 
maintenance of fair and orderly markets,\64\ and believes each assures 
fair competition among exchange markets, consistent with Section 
11A(a)(1)(C) of the Act.\65\
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    \64\ 17 CFR 242.608(b)(2).
    \65\ 15 U.S.C. 78k-1(a)(1)(C).
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    System Issues: \66\ This exception, similar to an exception in the 
Current Plan, permits a Participant to trade through a Protected 
Quotation if the Eligible Exchange displaying the Protected Quotation 
that was traded through was experiencing a failure, material delay, or 
malfunction of its systems or equipment when the Trade-Through 
occurred. This exception gives Participants a ``self-help'' remedy if 
another Eligible Exchange repeatedly fails to provide an immediate 
response to incoming orders attempting to access its quotes. As the 
Commission stated in approving a parallel exception for stocks under 
Regulation NMS, the Eligible Exchange receiving an order can only be 
held responsible for its own turnaround time (i.e., from the time it 
first received an order to the time it transmits a response to the 
order). Accordingly, the routing exchange will be required to develop 
policies and procedures that allow for any potential delays in 
transmission not attributable to the receiving exchange. This exception 
also covers any failure or malfunction of an Eligible Exchange's 
systems or equipment, as well as any material delay.\67\
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    \66\ Section 5(b)(i) of the Options Linkage Plan.
    \67\ See NMS Release at 37535, supra note 29.
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    Participants will need to establish specific objective parameters 
governing their use of this ``self-help'' exemption as part of their 
reasonable policies and procedures. The Commission believes, for 
example, a single failure to respond within one second generally will 
not justify future bypassing of another Eligible Exchange's quotations. 
Many failures to respond within one second in a short time period, in 
contrast, clearly will warrant use of the exception. The Commission 
believes that a Participant making use of this exception must notify 
the non-responding Eligible Exchange immediately after (or at the same 
time as) electing this exception pursuant to reasonable and objective 
standards contained in its policies and procedures in order to alert 
the non-responding Eligible Exchange that the Participant intends to 
make use of this exception with respect to the non-responding Eligible 
Exchange's quotes.\68\
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    \68\ Id.
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    The Commission believes that a Participant should be entitled to 
bypass an away market's quotations if that market fails to respond to 
incoming orders attempting to access a displayed quote. The Commission 
believes that this exception will provide Participants with the 
necessary flexibility for dealing with problems that occur on an away 
market during the trading day. Further, the Commission finds that this 
exception is in the public interest, appropriate for the protection of 
investors and the maintenance of fair and orderly markets,\69\ and 
believes it assures fair competition among exchange markets, consistent 
with Section 11A(a)(1)(C) of the Act.\70\
---------------------------------------------------------------------------

    \69\ 17 CFR 242.608(b)(2).
    \70\ 15 U.S.C. 78k-1(a)(1)(C).
---------------------------------------------------------------------------

    Trading Rotations: \71\ This exception, which is carried over from 
the Current Plan \72\ and similar to an exception available for NMS 
stocks under Regulation NMS,\73\ permits a Participant to trade through 
a Protected Quotation disseminated by an Eligible Exchange during a 
trading rotation. Options exchanges use a trading rotation to open an 
option for trading or reopen an option after a trading halt.
---------------------------------------------------------------------------

    \71\ Section 5(b)(ii) of the Options Linkage Plan.
    \72\ See Section 8(c)(iii)(E) of the Current Plan.
    \73\ See Rule 611(b)(3) of Regulation NMS under the Act (17 CFR 
242.611(b)(3)).
---------------------------------------------------------------------------

    As noted by the Participants, the trading rotation is effectively a 
single price auction to price the option,\74\ and there are no 
practical means to include prices on other exchanges in that 
auction.\75\ As such, the Commission emphasizes that the exception will 
not permit a Participant to declare a trading halt merely to be able to 
circumvent the operation of the Options Linkage Plan's Trade-Through 
provisions upon reopening; instead, the Commission believes a 
Participant must conduct, pursuant to its rules, a formalized and 
transparent process for executing orders during reopening after a 
trading halt that involves the queuing and ultimate execution of 
multiple orders at a single equilibrium price. In addition, a 
Participant must have formally declared a trading halt pursuant to its 
rules. Therefore, the Commission finds that it is reasonable to include 
this as an exception to the general prohibition on Trade-Throughs as it 
is in the public interest, appropriate for the protection of investors 
and the maintenance of fair and orderly markets,\76\ and believes it 
assures fair competition among exchange markets, consistent with 
Section 11A(a)(1)(C) of the Act.\77\
---------------------------------------------------------------------------

    \74\ See ISE Letter 2 and NYSE Arca Letter 2, supra note 5; see 
also Amex Letter 2, BSE Letter 2, CBOE Letter 2, Nasdaq Letter 2, 
and Phlx Letter 2, supra note 7.
    \75\ See ISE Letter 2 and NYSE Arca Letter 2, supra note 5; see 
also Amex Letter 2, BSE Letter 2, Nasdaq Letter 2, and Phlx Letter 
2, supra note 7.
    \76\ 17 CFR 242.608(b)(2).
    \77\ 15 U.S.C. 78k-1(a)(1)(C).
---------------------------------------------------------------------------

    Crossed Markets: \78\ This exception permits a Participant to trade 
through a Protected Quotation when the market is crossed, and 
corresponds to an exception for NMS stocks under Regulation NMS.\79\ A 
Crossed Market occurs when a Protected Bid is higher than a Protected 
Offer in a given options class. The Commission believes that it is 
appropriate to permit executions without regard to Trade-Throughs in a 
Crossed Market because allowing such transactions should permit the 
market to quickly resolve any unintentional crosses. For the foregoing 
reasons, the Commission finds that this exception is in the public 
interest, appropriate for the protection of investors and the 
maintenance of fair and orderly markets,\80\ and believes it assures 
fair competition among exchange markets, consistent with Section 
11A(a)(1)(C) of the Act.\81\
---------------------------------------------------------------------------

    \78\ Section 5(b)(iii) of the Options Linkage Plan.
    \79\ See Rule 611(b)(4) of Regulation NMS (17 CFR 
242.611(b)(4)).
    \80\ 17 CFR 242.608(b)(2).
    \81\ 15 U.S.C. 78k-1(a)(1)(C).
---------------------------------------------------------------------------

    Intermarket Sweep Orders: \82\ The Options Linkage Plan includes 
two exceptions from the prohibition against Trade-Throughs for certain 
transactions involving ISOs. These two exceptions correspond to the 
exceptions relating to ISOs for NMS stocks under Regulation NMS.\83\ 
First, the Options Linkage Plan permits a Participant to execute orders 
marked as ISOs even when the Participant is not at the national best 
bid or offer (``NBBO''). Second, a Participant is permitted to execute 
a transaction when such transaction is not at the NBBO, provided it 
simultaneously ``sweeps'' all better priced Protected Quotations by 
routing an ISO to execute against the full displayed size of any 
Protected Quotation that was traded through.
---------------------------------------------------------------------------

    \82\ Section 5(b)(iv) and (v) of the Options Linkage Plan.
    \83\ See Rule 611(b)(5) and (6) of Regulation NMS (17 CFR 
242.611(b)(5) and (6)).

---------------------------------------------------------------------------

[[Page 39367]]

    An ISO is defined as a limit order for an options series that, when 
routed to an Eligible Exchange, is identified as an Intermarket Sweep 
Order and, simultaneously with the routing of the order, one or more 
additional orders, as necessary, are routed to execute against the full 
displayed size of any Protected Bid, in the case of a limit order to 
sell, or any Protected Offer, in the case of a limit order to buy, for 
the options series with a price that is superior to the limit price of 
the order.\84\ Any such additional orders would also be marked as ISOs.
---------------------------------------------------------------------------

    \84\ Section 2(9) of the Options Linkage Plan.
---------------------------------------------------------------------------

    The availability of ISOs will allow the Participants to access 
multiple price levels simultaneously displayed on the same or multiple 
markets, without violating the prohibition against Trade-Throughs. As 
the Commission stated with respect to ISOs for stocks under Regulation 
NMS, the Commission believes that allowing a Participant to immediately 
execute an order identified as an ISO when that exchange is not at the 
NBBO is fully consistent with the principle of protecting the best 
displayed prices because the exception is premised on the condition 
that the market participant sending the ISO has already attempted to 
access all better-priced Protected Quotations up to their displayed 
size. Consequently, there is no reason why a Participant that receives 
an ISO while displaying an inferior-priced quotation should be required 
to delay an execution of the order.\85\ This exception should help to 
ensure more efficient and faster executions.
---------------------------------------------------------------------------

    \85\ See NMS Release at 37523, supra note 29.
---------------------------------------------------------------------------

    The second ISO Trade-Through exception, under subparagraph (b)(v) 
of Section 5 of the Options Linkage Plan, should benefit market 
participants in their ability to handle orders efficiently. For 
example, market participants should be able to use this exception to 
more efficiently execute block trades one or more minimum price 
increments away from the NBBO. So long as ISOs are simultaneously 
routed to execute against better-priced Protected Quotation on other 
markets, the block order could be executed contemporaneously with the 
routing of the ISOs.
    The Commission notes that Section 5(c) of the Options Linkage Plan 
requires Participants to take reasonable steps to establish that ISOs 
are properly routed in an attempt to execute against all applicable 
Protected Quotations.
    For the reasons stated above, the Commission finds that the 
exception from Trade-Through liability when an exchange or market 
participants sends an ISO is in the public interest, appropriate for 
the protection of investors and the maintenance of fair and orderly 
markets,\86\ and believes it assures fair competition among exchange 
markets, consistent with Section 11A(a)(1)(C) of the Act.\87\
---------------------------------------------------------------------------

    \86\ 17 CFR 242.608(b)(2).
    \87\ 15 U.S.C. 78k-1(a)(1)(C).
---------------------------------------------------------------------------

    Quote Flickering: \88\ Subparagraph (b)(vi) of Section 5 of the 
Options Linkage Plan sets forth an exception for flickering quotations, 
and corresponds to an exception for NMS stocks under Regulation 
NMS.\89\ It excepts a transaction if the Eligible Exchange displaying 
the Protected Quotation that was traded through had displayed, within 
one second prior to execution of the Trade-Through, a Best Bid or Best 
Offer, as applicable, for the options series with a price that was 
equal or inferior to the price of the Trade-Through transaction.
---------------------------------------------------------------------------

    \88\ Section 5(b)(vi) of the Options Linkage Plan.
    \89\ See Rule 611(b)(8) of Regulation NMS (17 CFR 
242.611(b)(8)).
---------------------------------------------------------------------------

    As the Commission stated with respect to the similar exception for 
stocks under Regulation NMS,\90\ this exception thereby provides a 
``window'' to address false indications of Trade-Throughs that in 
actuality are attributable to rapidly moving quotations. It should also 
reduce the number of instances in which a Participant must alter its 
normal trading procedures and route orders to other trading centers to 
comply with the Options Linkage Plan. The exception is thereby intended 
to promote more workable intermarket price protection. The Commission 
finds it is in the public interest, appropriate for the protection of 
investors and the maintenance of fair and orderly markets,\91\ and 
believes it assures fair competition among exchange markets, consistent 
with Section 11A(a)(1)(C) of the Act.\92\
---------------------------------------------------------------------------

    \90\ See NMS Release at 37536, supra note 29.
    \91\ 17 CFR 242.608(b)(2).
    \92\ 15 U.S.C. 78k-1(a)(1)(C).
---------------------------------------------------------------------------

    Non-Firm Quotes: \93\ This exception, which is carried over from 
the Current Plan,\94\ permits a Participant to trade through a 
Protected Quotation that was ``Non-Firm.'' \95\ ``Non-Firm'' is defined 
to mean, with respect to Quotations in an Eligible Options Class, that 
members of a Participant are relieved of their obligations under that 
Participant's firm quote rule in that Eligible Options Class.\96\
---------------------------------------------------------------------------

    \93\ Section 5(b)(vii) of the Options Linkage Plan.
    \94\ See Section 8(c)(iii)(C) of the Current Plan.
    \95\ See Section 2(11) of the Options Linkage Plan.
    \96\ The Commission notes that, when quotations in an Eligible 
Options Class are Non-Firm, exchange rules require the exchange to 
provide notice that its quotations are Non-Firm by appending an 
indicator to its quotations. See, e.g., CBOE Rule 43.14(b) and NYSE 
Arca Rule 6.86(d)(1)(C).
---------------------------------------------------------------------------

    The Commission believes that Participants should not be required to 
protect the price of an away market when that market identifies its 
quotes as ``Non-Firm.'' The Commission finds that this exception is in 
the public interest, appropriate for the protection of investors and 
the maintenance of fair and orderly markets,\97\ and believes it 
assures fair competition among exchange markets, consistent with 
Section 11A(a)(1)(C).\98\
---------------------------------------------------------------------------

    \97\ 17 CFR 242.608(b)(2).
    \98\ 15 U.S.C. 78k-1(a)(1)(C).
---------------------------------------------------------------------------

    Complex Trades: \99\ This exception carries forward the complex 
trade exception in Section 8(c)(iii)(G) of the Current Plan \100\ and 
permits a Participant to trade through a Protected Quotation if the 
transaction was part of a ``complex trade.'' The definition of 
``complex trade'' would be implemented through rules adopted by the 
Participants, which would be subject to notice, comment, and Commission 
review pursuant to the Section 19(b) rule filing process.
---------------------------------------------------------------------------

    \99\ Section 5(b)(viii) of the Options Linkage Plan.
    \100\ Section 8(c)(iii)(G) of the Current Plan.
---------------------------------------------------------------------------

    Complex trades, such as those submitted by market participants 
under the Proposing Exchanges complex order mechanisms,\101\ are 
composed of multiple transactions effected at a net price. As the 
Proposing Exchanges state,\102\ it is not always practical to require 
each leg to be transacted at a price that does not constitute a Trade-
Through, and the Commission believes that permitting an exception for 
transactions effected as a portion of a complex trade is appropriate. 
By narrowly crafting the definition of complex trades in each 
Participants' rules,\103\ the Commission believes that this exception 
will not undercut the general Trade-Through protections of the Options 
Linkage Plan, and finds it is in the public interest, appropriate for 
the protection of investors and the maintenance of fair and orderly 
markets,\104\ and believes it assures fair competition among exchange 
markets, consistent with Section 11A(a)(1)(C).\105\
---------------------------------------------------------------------------

    \101\ See, e.g., ISE Rule 722.
    \102\ See ISE Letter 2 and NYSE Arca Letter 2, supra note 5; see 
also Amex Letter 2, BSE Letter 2, CBOE Letter 2, Nasdaq Letter 2, 
and Phlx Letter 2, supra note 7.
    \103\ All changes to rules of national securities exchanges are 
subject to notice, comment and Commission review pursuant to Section 
19(b) of the Act. 15 U.S.C. 78s(b).
    \104\ 17 CFR 242.608(b)(2).
    \105\ 15 U.S.C. 78k-1(a)(1)(C).

---------------------------------------------------------------------------

[[Page 39368]]

    Customer Stopped Orders: \106\ This exception permits a Participant 
to trade through a Protected Quotation if the trade executed a 
``stopped order.'' The exception requires that the ``stopped order'' be 
for the account of a Customer; \107\ that the Customer agreed to the 
specified price on an order-by-order basis; and that the price of the 
Trade-Through was, for a stopped buy order, lower than the national 
Best Bid in the options series at the time of execution, or, for a 
stopped sell order, higher than the national Best Offer in the options 
series at the time of execution. This exception corresponds to the 
customer stopped order exception under Regulation NMS.\108\
---------------------------------------------------------------------------

    \106\ Section 5(b)(ix) of the Options Linkage Plan.
    \107\ ``Customer'' would be defined to mean an individual or 
organization that is not a ``Broker/Dealer.'' See Section 2(5) of 
the Options Linkage Plan.
    \108\ See Rule 611(b)(9) of Regulation NMS (17 CFR 
242.611(b)(9)).
---------------------------------------------------------------------------

    The Commission recognizes that the use of stopped orders is a 
valuable tool, particularly for the execution of large orders.\109\ The 
Commission believes that this narrowly-drawn exception would give 
market participants the ability to execute large Customer orders over 
time at a price agreed upon by a Customer, even though the price of the 
option may change before the order is executed in its entirety, without 
undermining the general principles of price protection under the 
Options Linkage Plan. For these reasons, the Commission finds that this 
exception is in the public interest, appropriate for the protection of 
investors and the maintenance of fair and orderly markets,\110\ and 
assures fair competition among exchange markets, consistent with 
Section 11A(a)(1)(C) of the Act.\111\
---------------------------------------------------------------------------

    \109\ See NMS Release at 37527, supra note 29.
    \110\ 17 CFR 242.608(b)(2).
    \111\ 15 U.S.C. 78k-1(a)(1)(C).
---------------------------------------------------------------------------

    Stopped Orders and Price Improvement: \112\ This exception permits 
a Participant to trade through a Protected Quotation if the transaction 
that constituted the Trade-Through was the execution by a Participant 
of an order that is stopped at a price that did not constitute a Trade-
Through at the time of the stop. This exception allows a Participant to 
seek price improvement for an order, even if the market moves in the 
interim, and the transaction ultimately is effected at a price that 
would trade through the then currently-displayed market. The rules of 
several of the Proposing Exchanges currently contain provisions 
relating to price improvement mechanisms.\113\
---------------------------------------------------------------------------

    \112\ Section 5(b)(x) of the Options Linkage Plan.
    \113\ See, e.g., Securities Exchange Act Release No. 50819 
(December 8, 2004), 69 FR 75093 (December 15, 2004) (SR-ISE-2003-06) 
(approving rules implementing ISE's Price Improvement Mechanism 
under ISE Rule 723).
---------------------------------------------------------------------------

    These price improvement mechanisms offer price improvement to 
orders received by the exchange during a specified period of time 
(``auction''). During this auction period, the NBBO could move from 
where it was when the order was received. However, the exchange is only 
required to guarantee a price no worse than the NBBO at the time the 
order was received. Thus, following the auction, an execution could 
result in a Trade-Through if the NBBO improves from the time the order 
was received although, had the order been executed at the time of 
receipt, the execution would not have resulted in a Trade-Through.
    This exception would allow a Participant to seek price improvement 
for an order, even if the market moves in the interim, and the 
transaction ultimately is effected at a price that would trade through 
the then currently-displayed market. By allowing this exception, the 
Commission expects that Participants would be able to continue to use 
price improvement mechanisms, thereby offering market participants 
potentially better-priced executions. The Commission finds that this 
exception is in the public interest, appropriate for the protection of 
investors and the maintenance of fair and orderly markets,\114\ and 
believes it assures fair competition among exchange markets, consistent 
with Section 11A(a)(1)(C) of the Act.\115\
---------------------------------------------------------------------------

    \114\ 17 CFR 242.608(b)(2).
    \115\ 15 U.S.C. 78k-1(a)(1)(C).
---------------------------------------------------------------------------

    Benchmark Trades: \116\ This exception permits a Participant to 
trade through a Protected Quotation if the trade was executed at a 
price not based directly or indirectly on the quoted price of an 
options series at the time of execution and for which the material 
terms were not reasonably determinable at the time of the commitment to 
make the trade.
---------------------------------------------------------------------------

    \116\ Section 5(b)(xi) of the Options Linkage Plan.
---------------------------------------------------------------------------

    This exception allows a ``benchmark order'' and corresponds to an 
exception for NMS stocks under Rule 611 of Regulation NMS.\117\ A 
common example of a benchmark order for NMS stocks is a volume-weighted 
average price, or ``VWAP,'' order. The Commission notes that none of 
the Proposing Exchanges currently permit these types of options trades, 
and any Participant seeking to make use of this exception would be 
required to submit a proposed rule change which would be subject to 
notice, comment and Commission review under Section 19(b) of the Act. 
The Commission finds that this exception is in the public interest, 
appropriate for the protection of investors and the maintenance of fair 
and orderly markets, and believes it assures fair competition among 
exchange markets, consistent with Section 11A(a)(1)(C) of the Act.\118\
---------------------------------------------------------------------------

    \117\ See Rule 611(b)(7) of Regulation NMS (17 CFR 
242.611(b)(7)).
    \118\ 15 U.S.C. 78k-1(a)(1)(C).
---------------------------------------------------------------------------

B. Locked and Crossed Markets

    The Options Linkage Plan also addresses Locked and Crossed 
Markets.\119\ The requirements in the Options Linkage Plan relating to 
Locked and Crossed Markets are virtually identical to those applicable 
to market centers for NMS stock under Regulation NMS.\120\
---------------------------------------------------------------------------

    \119\ Section 6 of the Options Linkage Plan. A ``Locked Market'' 
is defined as a quoted market in which a Protected Bid is equal to a 
Protected Offer in a series of an Eligible Options Class. See 
Section 2(10) of the Options Linkage Plan. A ``Crossed Market'' is 
defined as a quoted market in which a Protected Bid is higher than a 
Protected Offer in a series of an Eligible Options Class. See 
Section 2(4) of the Options Linkage Plan.
    \120\ See Rule 610(d) of Regulation NMS (17 CFR 242.610(d)).
---------------------------------------------------------------------------

    Specifically, the Options Linkage Plan requires each Participant to 
establish, maintain, and enforce written rules that require their 
members reasonably to avoid displaying Locked and Crossed Markets.\121\ 
Participants would also be required to establish, maintain, and enforce 
written rules reasonably designed to assure the reconciliation of 
Locked and Crossed Markets.\122\ Finally, the Options Linkage Plan 
would provide that Participants must establish, maintain, and enforce 
written rules that prohibit their members from engaging in a pattern or 
practice of displaying Locked and Crossed Markets, subject to 
exceptions as may be contained in the Participants' rules, as approved 
by the Commission.\123\
---------------------------------------------------------------------------

    \121\ Section 6(a) of the Options Linkage Plan.
    \122\ Section 6(b) of the Options Linkage Plan.
    \123\ Section 6(c) of the Options Linkage Plan. The Commission 
notes that the proposed rule changes relating to all necessary 
implementing rules of the Participants, including those required by 
Section 6 of the Options Linkage Plan, would be subject to notice, 
comment, and Commission review pursuant to Section 19(b) of the Act.
---------------------------------------------------------------------------

    The Commission recognizes that Section 6 of the Options Linkage 
Plan, by restricting Locked Markets, can prohibit the display of an 
order that would otherwise have been displayed and reduced the quoted 
spread to zero. However, as the Commission stated with respect to 
locked markets for stocks under Regulation NMS, the

[[Page 39369]]

Commission believes that Locked Markets may not actually represent two 
market participants willing to buy and sell at the same price. Instead, 
a locking market participant may not truly be willing to trade at the 
displayed locking price, but chooses to lock rather than execute 
against the already-displayed quotation to receive a liquidity rebate. 
The Commission believes that giving priority to the first-displayed 
Protected Bid or Protected Offer, particularly when it includes a 
public customer's order, will encourage price discovery and contribute 
to fair and orderly markets.\124\
---------------------------------------------------------------------------

    \124\ See NMS Release at 37547, supra note 29.
---------------------------------------------------------------------------

    The Options Linkage Plan is designed to ensure that the display of 
locked and crossed markets would be restricted, while also recognizing 
that locked and crossed markets do occur accidentally and cannot always 
be avoided. Thus, the Options Linkage Plan requires that the 
Participants have written rules that are reasonably designed to assure 
the reconciliation of any lock or cross. Further, the Options Linkage 
Plan expressly prohibits a pattern or practice of locking or crossing 
away markets.
    In addition, the Options Linkage Plan would allow exceptions to its 
general Locked and Crossed Markets provision as might be contained in a 
given Participant's rules. As with all proposed rule changes of 
national securities exchanges, such rule changes would be subject to 
notice, comment and Commission review under Section 19(b)(1) of the 
Act.\125\ The Commission believes that these provisions are designed to 
ensure that the display of Locked and Crossed Markets will be limited 
and that any such display will be promptly reconciled.
---------------------------------------------------------------------------

    \125\ 15 U.S.C. 78s(b)(1).
---------------------------------------------------------------------------

    For the reasons stated above, the Commission finds that the Options 
Linkage Plan's provisions relating to Locked and Crossed Markets are in 
the public interest, appropriate for the protection of investors and 
the maintenance of fair and orderly markets,\126\ and believes they 
assure fair competition among exchange markets, consistent with Section 
11A(a)(1)(C).\127\
---------------------------------------------------------------------------

    \126\ 17 CFR 242.608(b)(2).
    \127\ 15 U.S.C. 78k-1(a)(1)(C).
---------------------------------------------------------------------------

C. Joining the Proposed Plan

    Any national securities exchange would be eligible to become a 
Participant by executing a copy of the Options Linkage Plan and 
providing each Participant with a copy of such executed Options Linkage 
Plan \128\ if it is: (1) Registered with the Commission in accordance 
with Section 6(a) of the Act; (2) a Participant Exchange in OCC; \129\ 
and (3) a party to the OPRA Plan.\130\ Further, any such national 
securities exchange wishing to become a Participant would be required 
to file an amendment to the Options Linkage Plan by executing a copy of 
the Options Linkage Plan and filing such executed Options Linkage Plan 
to the Commission.\131\ Such amendment would be effective when the 
amendment is approved by the Commission or otherwise becomes effective 
pursuant to Section 11A of the Act and Rule 608 thereunder.\132\ The 
Commission finds that this process for joining the Options Linkage Plan 
is in the public interest,\133\ and believes it is consistent with 
Section 11A(a)(1)(C) because it is designed to ensure that reasonable 
procedures are in place to permit additional exchanges to also 
participate in the Options Linkage Plan.\134\
---------------------------------------------------------------------------

    \128\ Section 3(c) of the Options Linkage Plan.
    \129\ For a definition of a ``Participant Exchange,'' see 
Section VII of the OCC by-laws.
    \130\ For more information on who is a party to the OPRA Plan, 
see Section I of the OPRA Plan.
    \131\ Section 4(b) of the Options Linkage Plan.
    \132\ Id. These requirements are identical to those contained in 
the Current Plan. See Sections 4(c)(i) and 5(c) of the Current Plan. 
The Current Plan also requires that an eligible exchange pay a fee 
to join the Current Plan. See Section 4(c)(i)(iv) of the Current 
Plan. The Options Linkage Plan does not require an Eligible Exchange 
to pay a fee to join the Options Linkage Plan.
    \133\ 17 CFR 242.608(b)(2).
    \134\ 15 U.S.C. 78k-1(a)(1)(C).
---------------------------------------------------------------------------

D. Withdrawal From the Proposed Plan

    Any Participant would be able to withdraw from the Options Linkage 
Plan at any time by providing not less than 30 days' prior written 
notice to each of the other Participants of such intent to 
withdraw.\135\ To withdraw, such Participant also would be required to 
effect an amendment to the Options Linkage Plan by submitting such 
amended Options Linkage Plan to the Commission for approval.\136\ In 
submitting the amended Options Linkage Plan to the Commission, the 
Participant proposing to withdraw from the Options Linkage Plan would 
be required to state how the Participant plans to accomplish, by 
alternate means, the goal of the Options Linkage Plan regarding 
limiting Trade-Throughs of prices on other exchanges trading the same 
options classes.\137\ Such withdrawal from the Options Linkage Plan 
would be effective when the amendment is approved by the Commission or 
otherwise becomes effective pursuant to Section 11A of the Act and Rule 
608 thereunder. Upon the effectiveness of such withdrawal, the 
withdrawing Participant would have no further rights or obligations 
under the Options Linkage Plan.
---------------------------------------------------------------------------

    \135\ Section 3(d) of the Options Linkage Plan.
    \136\ Section 4(c) of the Options Linkage Plan.
    \137\ Id. These requirements are identical to those contained in 
the Current Plan. See Sections 4(d) and 5(c)(iii) of the Current 
Plan.
---------------------------------------------------------------------------

    The Commission finds that these requirements for withdrawal from 
the Options Linkage Plan are in the public interest, appropriate for 
the protection of investors and the maintenance of fair and orderly 
markets,\138\ and believes it assures fair competition among exchange 
markets, consistent with Section 11A(a)(1)(C).\139\
---------------------------------------------------------------------------

    \138\ 17 CFR 242.608(b)(2).
    \139\ 15 U.S.C. 78k-1(a)(1)(C).
---------------------------------------------------------------------------

E. Implementation

    The Proposed Plan states that the ``[Participants] shall implement 
[the plan] * * * no later than February 27, 2009; provided that, unless 
the [Commission] otherwise authorizes, the [Participants] shall not 
implement [the plan] until all Eligible Exchanges either (1) have 
become parties to [the plan] and the [Commission] has approved all 
necessary implementing rules or (2) have developed the ability to 
accept and execute incoming Intermarket Sweep Orders.'' \140\
---------------------------------------------------------------------------

    \140\ See Section 7 of the Proposed Plan.
---------------------------------------------------------------------------

    To provide clarity to market participants regarding the 
implementation date of the plan, the Commission, after consultation 
with the Proposing Exchanges, has modified the Proposed Plan to change 
the implementation date in Section 7 from February 27, 2009 to August 
31, 2009. In addition, the Commission notes that all seven options 
exchanges \141\ have joined in filing the Proposed Plan with the 
Commission, and each has submitted proposed rule changes pursuant to 
Section 19(b) of the Act to modify its rules to comply with the Options 
Linkage Plan.\142\ The Commission believes that the provision that 
would permit the plan to be implemented if an Eligible Exchange 
``developed the ability to accept and execute incoming Intermarket 
Sweep Orders,'' even if such exchange had not become a party to the 
plan is no longer necessary because all seven options exchanges have 
joined the Options

[[Page 39370]]

Linkage Plan and therefore will, upon implementation of the Options 
Linkage Plan, accept and execute ISOs.
---------------------------------------------------------------------------

    \141\ That is, CBOE, ISE, Nasdaq, BX, Phlx, Amex and NYSE Arca.
    \142\ See, e.g., Securities Exchange Act Release Nos. 60014 
(June 1, 2009); and 74 FR 27224 (June 8, 2009) (SR-ISE-2009-27) and 
60015 (June 1, 2009); 74 FR 27375 (June 9, 2009) (SR-NYSEAmex-2009-
19) which propose rules such as provisions that contain relevant 
definitions, an order protection rule, and a locked and crossed 
market rule, which correspond to the provisions in the Options 
Linkage Plan.
---------------------------------------------------------------------------

    The Commission finds that these modifications to Section 7 of the 
Proposed Plan are necessary and appropriate and will further the 
purposes of the Act by providing clarity to market participants 
regarding the implementation of the plan while providing appropriate 
time to self-regulatory organizations to prepare for implementation.
    With these modifications, unless the Commission otherwise 
authorizes, the plan may only be implemented by the Proposing Exchanges 
when all Proposing Exchanges' proposed rule changes containing the 
necessary implementing rules \143\ have been approved by the 
Commission.
---------------------------------------------------------------------------

    \143\ See id.
---------------------------------------------------------------------------

IV. Conclusion

    It is hereby ordered, that pursuant to Section 11A(a)(3)(B) of the 
Act \144\ and Rule 608 thereunder,\145\ that the Proposed Plan 
submitted by CBOE, ISE, Nasdaq, BX, Phlx, Amex, and NYSE Arca, as 
modified herein, is approved and declared effective,\146\ and that 
CBOE, ISE, Nasdaq, BX, Phlx, Amex, and NYSE Arca are authorized to act 
jointly to implement the Options Order Protection and Locked/Crossed 
Market Plan as a means of facilitating a national market system.
---------------------------------------------------------------------------

    \144\ 15 U.S.C. 78k-1(a)(3)(B).
    \145\ 17 CFR 242.608.
    \146\ The approved Plan is attached here as Appendix A.

    By the Commission.
Florence E. Harmon,
Deputy Secretary.

Appendix A

Options Order Protection and Locked/Crossed Market Plan

Section 1--Preamble

    The Participants submit to the SEC this Plan providing a 
framework for order protection and addressing Locked and Crossed 
Markets in Eligible Options Classes. The purpose of the Plan is to 
enable the Participants to act jointly in establishing a framework 
for providing order protection and addressing Locked and Crossed 
Markets in Eligible Options Classes. In addition, the Plan provides 
for a non-exclusive method for achieving order protection and 
addressing Locked and Crossed Markets. The Participants will submit 
to the SEC for approval their respective rules that will implement 
the framework of the Plan. The Participants request that the SEC 
issue an order pursuant to Section 11A(a)(3)(B) of the Exchange Act 
and Rule 608 thereunder evidencing its approval of the Plan.

Section 2--Definitions

    (1) ``Best Bid'' and ``Best Offer'' mean the highest priced Bid 
and the lowest priced Offer.
    (2) ``Bid'' or ``Offer'' means the bid price or the offer price 
communicated by a member of an Eligible Exchange to any Broker/
Dealer, or to any customer, at which it is willing to buy or sell, 
as either principal or agent, but shall not include indications of 
interest.
    (3) ``Broker/Dealer'' means an individual or organization 
registered with the SEC in accordance with Section 15(b)(1) of the 
Exchange Act or a foreign broker or dealer exempt from such 
registration pursuant to Rule 15a-6 under the Exchange Act.
    (4) ``Crossed Market'' means a quoted market in which a 
Protected Bid is higher than a Protected Offer in a series of an 
Eligible Class.
    (5) ``Customer'' means an individual or organization that is not 
a Broker/Dealer.
    (6) ``Eligible Exchange'' means a national securities exchange 
registered with the SEC in accordance with Section 6(a) of the 
Exchange Act that: (a) As a Participant Exchange in OCC (as that 
term is defined in Section VII of the OCC by-laws); (b) is a party 
to the OPRA Plan (as that term is described in Section I of the OPRA 
Plan); and (c) if the national securities exchange chooses not to 
become a party to this Plan, is a participant in another plan 
approved by the Commission providing for comparable Trade-Through 
and Locked and Crossed Market protection.
    (7) ``Eligible Options Class'' means all option series overlying 
a security (as that term is defined in Section 3(a)(10) of the 
Exchange Act) or group of securities, including both put options and 
call options, which class is available for trading on two or more 
Eligible Exchanges.
    (8) ``Exchange Act'' means the Securities Exchange Act of 1934, 
as amended.
    (9) ``Intermarket Sweep Order (ISO)'' means a limit order for an 
options series that meets the following requirements:
    (a) When routed to an Eligible Exchange, the order is identified 
as an ISO;
    (b) Simultaneously with the routing of the order, one or more 
additional ISOs, as necessary, are routed to execute against the 
full displayed size of any Protected Bid, in the case of a limit 
order to sell, or any Protected Offer, in the case of a limit order 
to buy, for the options series with a price that is superior to the 
limit price of the ISO, with such additional orders also marked as 
ISOs.
    (10) ``Locked Market'' means a quoted market in which a 
Protected Bid is equal to a Protected Offer in a series of an 
Eligible Options Class.
    (11) ``Non-Firm'' means, with respect to Quotations in an 
Eligible Options Class, that members of a Participant are relieved 
of their obligations under that Participant's firm quote rule in 
that Eligible Options Class.
    (12) ``OCC'' means The Options Clearing Corporation.
    (13) ``OPRA'' means the Options Price Reporting Authority.
    (14)''OPRA Plan'' means the plan filed with the SEC pursuant to 
Section 11Aa(1)(C)(iii) of the Exchange Act, approved by the SEC and 
declared effective as of January 22, 1976, as from time to time 
amended.
    (15) ``Participant'' means an Eligible Exchange whose 
participation in the Plan has become effective pursuant to Section 
3(c) of the Plan.
    (16) ``Plan'' means the plan amended and restated in this 
instrument as from time to time amended in accordance with its 
provisions.
    (17) ``Protected Bid'' or ``Protected Offer'' means a Bid or 
Offer in an options series, respectively, that:
    a. Is displayed by an Eligible Exchange;
    b. Is disseminated pursuant to the OPRA Plan; and
    c. Is the Best Bid or Best Offer, respectively, of an Eligible 
Exchange.
    (18) ``Protected Quotation'' means a Protected Bid or Protected 
Offer.
    (19) ``Quotation'' means a Bid or Offer.
    (20) ``SEC'' means the United States Securities and Exchange 
Commission.
    (21) ``Trade-Through'' means a transaction in an options series, 
either as principal or agent, at a price that is lower than a 
Protected Bid or higher than a Protected Offer.

Section 3--Parties to the Plan

    (a) List of Parties
    The parties to the Plan are as follows:

    Boston Stock Exchange, Inc., registered as a national securities 
exchange under the Exchange Act and having its principal place of 
business at 100 Franklin Street, Boston, Massachusetts 02110.
    Chicago Board Options Exchange, Incorporated, registered as a 
national securities exchange under the Exchange Act and having its 
principal place of business at 400 South LaSalle Street, Chicago, 
Illinois 60605.
    International Securities Exchange, LLC, registered as a national 
securities exchange under the Exchange Act and having its principal 
place of business at 60 Broad Street, New York, New York 10004.
    The NASDAQ Stock Market LLC, registered as a national securities 
exchange under the Exchange Act and having its principal place of 
business at One Liberty Plaza, 50th Floor, New York, New York 10006.
    NASDAQ OMX PHLX, Inc., registered as a national securities 
exchange under the Exchange Act and having its principal place of 
business at 1900 Market Street, Philadelphia, Pennsylvania 19103.
    NYSE Alternext US LLC, registered as a national securities 
exchange under the Exchange Act and having its principal place of 
business at 11 Wall Street, New York, NY 10005.
    NYSE Arca, Inc., registered as a national securities exchange 
under the Exchange Act and having its principal place of business at 
100 South Wacker Drive, Suite 1800, Chicago, IL 60606.

    (b) Compliance Undertaking
    By subscribing to and submitting the Plan for filing with the 
SEC, each Participant agrees to enforce compliance by its members 
with the provisions of the Plan.
    (c) Entry of New Participants
    The Participants agree that any other Eligible Exchange may 
become a Participant by: (i) Executing a copy of the Plan, as then 
in effect; (ii) providing each then-current

[[Page 39371]]

Participant with a copy of such executed Plan; and (iii) effecting 
an amendment to the Plan as specified in Section 4(b) of the Plan.
    (d) Withdrawal from the Plan
    Any Participant may withdraw from the Plan at any time by: (i) 
Providing not less than 30 days' prior written notice to each of the 
other Participants of such intent to withdraw; and (ii) effecting an 
amendment to the Plan as specified in Section 4(c) of the Plan. Upon 
the effectiveness of such withdrawal the withdrawing Participant 
shall have no further rights or obligations whatsoever under the 
Plan.

Section 4--Amendments to the Plan

    (a) General Amendment Authority
    Except with respect to:
    (i) the addition of new Participants to the Plan; and
    (ii) the withdrawal of a Plan Participant,

any proposed change in, addition to, or deletion from the Plan may 
be effected only by means of a written amendment to the Plan that is 
unanimously approved by the Participants and that: (A) sets forth 
the change, addition or deletion; (B) is executed on behalf of each 
Participant; and (C) is approved by the SEC or otherwise becomes 
effective pursuant to Section 11A of the Exchange Act and Rule 608 
thereunder.
    (b) New Participants
    With respect to new Participants, an amendment to the Plan may 
be effected by a new Eligible Exchange executing a copy of the Plan, 
as then in effect (with the only change being the addition of the 
new Participant's name in Section 3(a) of the Plan), and submitting 
such executed Plan to the SEC. Such amendment will be effective when 
the amendment is approved by the SEC or otherwise becomes effective 
pursuant to Section 11A of the Exchange Act and Rule 608 thereunder.
    (c) Withdrawal from the Plan
    A Participant seeking to withdraw from the Plan shall effect an 
amendment to the Plan as then in effect (with the only change being 
the deletion of the Participant's name in Section 3(a) of the Plan) 
by submitting such amended Plan to the SEC for approval. In 
submitting the amended Plan to the SEC, the Participant proposing to 
withdraw from the Plan shall state how the Participant plans to 
accomplish, by alternate means, the goal of the Plan regarding 
limiting Trade-Throughs of prices on other exchanges trading the 
same options classes. Such withdrawal from the Plan shall be 
effective when the amendment is approved by the SEC or otherwise 
becomes effective pursuant to Section 11A of the Exchange Act and 
Rule 608 thereunder.

Section 5--Order Protection

    (a) Order Protection
    (i) Prevention of Trade-Throughs. Each Participant agrees that 
it shall establish, maintain and enforce written policies and 
procedures as approved by the SEC that are reasonably designed to 
prevent Trade-Throughs in that Participant's market in Eligible 
Options Classes that do not fall within an exception set forth in 
paragraph (b) below, and, if relying on such exception, that are 
reasonably designed to assure compliance with the terms of the 
exception.
    (ii) Surveillance. Each Participant agrees to conduct 
surveillance of its market on a regular basis to ascertain the 
effectiveness of the policies and procedures required by paragraph 
(a)(1) of this section, and to take prompt action to remedy 
deficiencies in such policies and procedures.
    (b) Exceptions.
    (i) The transaction that constituted the Trade-Through was 
effected when the Eligible Exchange displaying the Protected 
Quotation that was traded through was experiencing a failure, 
material delay, or malfunction it its systems or equipment;
    (ii) The transaction traded through a Protected Quotation being 
disseminated by an Eligible Exchange during a trading rotation;
    (iii) The transaction that constituted the Trade-Through 
occurred when there was a Crossed Market;
    (iv) The transaction that constituted the Trade-Through was the 
execution of an order identified as an Intermarket Sweep Order;
    (v) The transaction that constituted the Trade-Through was 
effected by a Participant that simultaneously routed an Intermarket 
Sweep Order to execute against the full displayed size of any 
Protected Quotation that was traded through;
    (vi) The Eligible Exchange displaying the Protected Quotation 
that was traded through had displayed, within one second prior to 
execution of the Trade-Through, a Best bid or Best offer, as 
applicable, for the options series with a price that was equal or 
inferior to the price of the Trade-Through transaction;
    (vii) The Protected Quotation traded through was being 
disseminated from an Eligible Exchange whose Quotations were Non-
Firm with respect to such options series;
    (viii) The transaction that constituted the Trade-Through was 
effected as a portion of a ``complex trade,'' as defined in the 
rules of a Participant;
    (ix) The transaction that constituted the Trade-Through was the 
execution by a Participant of an order for which, at the time of 
receipt of the order, a member of the Participant had guaranteed an 
execution at no worse than a specified price (a ``stopped order''), 
where:
    (A) The stopped order was for the account of a Customer;
    (B) the Customer agreed to the specified price on an order-by-
order basis; and
    (C) the price of the Trade-Through was, for a stopped buy order, 
lower than the national Best Bid in the options series at the time 
of execution, or, for a stopped sell order, higher than the national 
Best Offer in the options series at the time of execution;
    (x) The transaction that constituted the Trade-Through was the 
execution by a Participant of an order which was stopped at a price 
that did not Trade-Through another Eligible Exchange at the time of 
the stop; or
    (xi) The transaction that constituted the Trade-Through was the 
execution of an order at a price that was not based, directly or 
indirectly, on the quoted price of the options series at the time of 
execution and for which the material terms were not reasonably 
determinable at the time the commitment to execute the order was 
made.
    (c) Intermarket Sweep Orders. Participants shall take reasonable 
steps to establish that Intermarket Sweep Orders meet the 
requirements of Section 2(9) of the Plan.

Section 6--Locked and Crossed Markets

    The Participants agree that they shall establish, maintain and 
enforce written rules that:
    (a) Require their members reasonably to avoid displaying Locked 
and Crossed Markets;
    (b) Are reasonably designed to assure the reconciliation of 
Locked and Crossed Markets; and
    (c) Prohibit its members from engaging in a pattern or practice 
of displaying Locked and Crossed Markets;

in all cases subject to such exceptions as may be contained in the 
rules of a Participant approved by the Commission.

Section 7--Implementation

    The Parties shall implement this Plan on a date upon which all 
Parties agree, but no later than August 31, 2009; provided that, 
unless the SEC otherwise authorizes, the Parties shall not implement 
this Plan unless all Eligible Exchanges have become parties to this 
Plan and the SEC has approved all necessary implementing rules.

Section 8--Counterparts and Signatures

    The Plan may be executed in any number of counterparts, no one 
of which need contain all signatures of all Participants, and as 
many of such counterparts as shall together contain all such 
signatures shall constitute one and the same instrument.

    In Witness Whereof, this Plan has been executed as of the ------ 
2009 by each of the parties hereto.

CHICAGO BOARD OPTIONS EXCHANGE, INCORPORATED
By:--------------------------------------------------------------------
Date:------------------------------------------------------------------

INTERNATIONAL SECURITIES EXCHANGE, LLC

By:--------------------------------------------------------------------
Date:------------------------------------------------------------------

The NASDAQ STOCK MARKET LLC

By:--------------------------------------------------------------------
Date:------------------------------------------------------------------

NASDAQ OMX BX, INC.

By:--------------------------------------------------------------------
Date:------------------------------------------------------------------

NASDAQ OMX PHLX, Inc.

By:--------------------------------------------------------------------
Date:------------------------------------------------------------------


NYSE AMEX LLC
By:--------------------------------------------------------------------
Date:------------------------------------------------------------------

NYSE ARCA, INC.
By:--------------------------------------------------------------------
Date:------------------------------------------------------------------

[FR Doc. E9-18763 Filed 8-5-09; 8:45 am]

BILLING CODE 8010-01-P
