On March 30, the Securities and Exchange Commission published for comment a proposed plan by the options exchanges that would replace the current intermarket linkage plan. Under the existing intermarket linkage plan, the Options Clearing Corporation (OCC) operates a stand-alone system on behalf of all of the options exchanges. The new plan moves away from a “system-based” approach to a “rules-based” approach that would require neither a central linkage system nor a complex set of operating rules.  

Order Protection. Similar to Regulation NMS, which applies to the equities markets, the new plan would rely on a rules-based price protection system to protect against “trade-throughs.” Each exchange participating in the new plan would be required to adopt rules reasonably designed to prevent trade-throughs in eligible options classes.

Exceptions from Trade-Through Prohibition. The new plan provides exceptions from the prohibition against trade-throughs for certain transactions that are similar to the exceptions under Regulation NMS. Of particular importance is the exception for Intermarket Sweep Orders, which permits a participant to access a quote that is inferior to the national best bid or offer as long as orders are sent simultaneously to trade against all protected quotations.  

Locked and Crossed Markets. The new plan would require participants to adopt rules that (i) require members to take reasonable measures to avoid displaying locked and crossed markets; (ii) are reasonably designed to ensure the reconciliation of locked and crossed markets; and (iii) prohibit members from engaging in a pattern or practice of displaying locked and crossed markets.  

Methods for Compliance. Under the new plan, a participant has two alternatives for compliance: a participant may utilize private order routing arrangements (like Regulation NMS) or use the central system operated by the OCC.  

Comments are due on or before April 23.