By single-listing companies' options, the department says, the exchanges forced many investors to pay higher prices than they would have in a more competitive environment in which all options were listed regardless of the exchange.
In addition, the Securities and Exchange Commission ordered the American Stock Exchange, the Chicago Board Options Exchange, the Pacific Exchange and the Philadelphia Stock Exchange to spend $77 million on surveillance and enforcement to ensure that the exchanges' traders comply with their own rules.
Simultaneously with the filing of the lawsuit, the four exchanges agreed to a consent decree in which they agree to cease uncompetitive practices. If approved by a judge, the decree would immediately settle the lawsuit.
"We found that they did limit multiple listings without expressively finding that they had an agreement or worked together," said Thomas C. Newkirk, associate director of the Securities and Exchange Commission's enforcement division. "We expect to find more competition in options, better prices and fairer markets" as a result of the settlement.
Options give investors a right to buy or sell shares at a fixed price during a specified period of time. For example, an option contract might allow an investor to purchase 100 shares of Intel at $80 by Dec. 15.
Companies register their options with specific exchanges. Ideally, those options would be quoted and traded on all the exchanges. However, critics suspected there was an unspoken agreement among the exchanges not to list options that were registered on other exchanges.
In some cases, regulators said the practice was overt. "For example, if two exchanges each have an exclusive listing and the companies that relate to those listings merge, only one exchange would end up listing the merged company," said Leo Wang, assistant director of the SEC's enforcement division.
The result for investors was higher prices.
"What that created was less liquidity in the marketplace," said Hank Boyce, vice president at Salomon Smith Barney.
Each of the exchanges released statements saying they were pleased the issue had been resolved.
"Today's announcement ends an exercise that was both expensive and time consuming," Philip D. DeFeo, CEO of the Pacific Stock Exchange, said in a statement. "We can now focus our full attention and efforts on projects that are critically important to the long-term future of the exchange."
The SEC had been investigating the options practices since last year. By summer 1999, regulatory pressure on the exchanges caused some to move to multiple listings.
"For me, as a broker, (multiple listing) is great because I'm getting much better execution on my option and I'm getting much better prices. A lot of times I would have to struggle to get a reasonable price," Boyce said.
If a number of different exchanges are competing against each other, the gap between bid and ask prices tends to be narrower, and investors will be able to get better prices.
"Investors rely on vibrant competition among our options markets to drive prices to fair and efficient levels and to fuel technological innovation," Richard Walker, director of the SEC's Division of Enforcement, said in a statement. "The proceedings announced today underscore the commitment of the commission and the Department of Justice to take action where impediments to competition are found."