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Paul:
What do you think about this now?
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Friday February 12, 2:48 pm Eastern Time
Suits against US option markets seen hard to prove
By Debra Sherman
CHICAGO, Feb 12 (Reuters) - Two lawsuits against U.S. options exchanges that allege the exchanges colluded to keep prices artificially high are likely to have a difficult time in court, securities lawyers said.
The suits, filed in New York earlier this month, are seeking class action status.
One was filed by Andrew Friedman, a New York attorney who was involved in a similar class-action suit against the Nasdaq electronic stock market filed in 1994 and settled last month.
The complaints allege that the Chicago Board Options Exchange (CBOE), the American Stock Exchange, the Pacific Exchange, the Philadelphia Stock Exchange and the New York Stock Exchange conspired to keep spreads -- the difference between bid and ask prices -- unfairly wide on options listed on only one exchange.
The New York Stock Exchange sold its options business to the CBOE in 1997.
The suit filed by Friedman charges that ''each exchange agreed to voluntarily refrain from listing and trading class options to purchase or sell the underlying stock of certain blue chip corporations...because option classes...of such corporations had previously been traded exclusively on just one of the five then existing exchanges prior to January 20, 1990.''
The leading exchanges have long had a tacit agreement to leave existing single listings unchallenged while competing only for new listings.
Securities attorney Charles Mills of Kirkpatrick & Lockhart of Washington, D.C., said the exchanges are likely to argue that creating copycat contracts would have been too expensive when a competing exchange had all the liquidity.
Mills said the case against the Nasdaq, charged with duping customers by failing to provide the best prices and failing to honor posted stock quotes, was more straightforward and easier to prove than the suits against the options exchanges.
''Here, they will have to look at all the exchanges,'' he said. ''It's a massive undertaking, whereas in the Nasdaq case there was just one market. In my view, the suits against the exchanges will be more difficult to prove liability.''
Arthur Don, a securities attorney and partner at D'Ancona & Pfaum in Chicago, agreed. ''I'm not sure how they can infer there was collusion to keep the spreads wide,'' he said. ''The suit looks like it's modeled after the Nasdaq (lawsuit), but I think it will be more difficult to prove. In the Nasdaq case, they had tapes of conversations.''
Friedman acknowledged that his suit might be more difficult to prove. ''This may be a harder case than the Nasdaq case. We'll see,'' he said.
Friedman said he has been examining the issue of multiple listings and said that spreads are wider on contracts that are singly listed. He said he planned to subpoena market makers, traders and clearing firms as well as exchange officials.
For years, the U.S. Securities and Exchange Commission has urged the options exchanges to list each other's options contracts in order to create more competitive markets.
More recently, the SEC urged the four exchanges to link their markets to the National Market System, an electronic order-execution system created about 25 years ago by Congress, to ensure that trades would be executed at the best price. The SEC first suggested a linkup 10 years ago, the CBOE said.
The U.S. Justice Department has been investigating the exchanges' listing practices, although it has not yet issued a report on its findings.
''There's not anything new in this suit,'' CBOE spokeswoman Carol Kennedy said. ''They are the same issues as the Justice Department looked at. Private actions like this (suit) are something that often follow a government investigation.''
The other exchanges declined to comment.
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