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Market Structure Developments

Linkage Plan, Order Routing, Market Fragmentation, and More up for Discussion by SEC

By John M. Baker, Esq.

The SEC on July 25 approved an options intermarket linkage plan that was jointly submitted by the Chicago Board Options Exchange, the International Securities Exchange, and the American Stock Exchange. The SEC also approved a rule proposal regarding the quotation obligations of options exchanges and market makers, and disclosure by broker-dealers of executions of customer options orders at prices inferior to the quote.

In addition, the SEC approved a second rule proposal that would require greater disclosure of order routing and order execution practices by brokers and market centers. The two proposals will be open for comment for 45 days after publication in the Federal Register.

The SEC news release, with links to additional information, is available at

The SEC earlier this year issued a concept release on market fragmentation. Release No. 34-42450, 65 Fed. Reg. 10,577 (Feb. 23, 2000). The SEC has determined not to take action at this time on the price/time priority alternatives described in the fragmentation release, but is moving forward with the option to improve disclosure of order routing and execution practices. Release No. 34-43084 (July 28, 2000).

Under proposed Rule 11Ac1-5, market centers that trade national market system securities would be required to make available to the public monthly electronic reports that include uniform statistical measures of execution quality on a security-by-security basis. Under proposed Rule 11Ac1-6, broker-dealers that route orders in equity and option securities on behalf of customers would be required to make publicly available quarterly reports that describe their order routing practices and disclose the venues to which customer orders are routed for execution.

In addition, broker-dealers would be required to disclose to customers, on request, where their individual orders were routed for execution. Release 34-43084, which was posted today, also discusses a number of measures that the SEC currently is considering to strengthen quote and price competition in the securities markets:

The SEC also posted its proposals on firm quote and trade-through disclosure rules for options. Release No. 34-43085 (July 28, 2000). The SEC is proposing to amend Rule 11Ac1-1 under the Exchange Act to require options exchanges and options market makers to publish firm quotes.

The SEC also is proposing new Rule 11Ac1-7 under the Exchange Act to require a broker-dealer to disclose on its customer’s confirmation statement when the customer’s order for listed options was executed at a price inferior to a better published quote and what that better quote was, unless the transaction was effected on a market that is a participant in an intermarket options linkage plan approved by the SEC.

The release is available at

The SEC on July 25 also announced that it is establishing a federal Advisory Committee on Market Information to assist it in evaluating issues relating to the public availability of market information in the equities and options markets. The committee will have a broad mandate to explore both fundamental matters, such as the benefits of price transparency and consolidated market information, and practical issues such as the most effective methods of consolidating market data.

The SEC news release is available at

The SEC on July 26 announced that the national securities exchanges and the NASD have submitted a comprehensive phase-in plan for decimal pricing in equity securities and options. The proposed plan calls for decimal pricing to begin in 13 exchange-listed securities and related options on August 28, 2000, with phase-in complete at some point between December 2000 and April 9, 2001.

The SEC announcement, with a link to the proposed plan, is available at

Copyright 2000, John M. Baker, Esq., Stradley, Ronon, Stevens & Young, LLP, 1220 19th Street, N.W., Suite 700, Washington, DC 20036 – (202) 822-9611- Fax (202) 822-0140 This article was originally posted to the FundLaw List, To subscribe to FundLaw, send a blank e-mail to

Nothing herein is intended as legal or financial advice. The law is different in different jurisdictions, and the facts of a particular matter can change the application of the law. Please consult an attorney or your financial advisor before acting upon the information contained in this article.  

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