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August 9, 2006

Options Exchanges Act On Insider Trading

By Gregory Bresiger

The country's six options exchanges have formed a central regulatory authority under a plan designed by the Chicago Board Options Exchange (CBOE) to monitor insider trading involving exchange members.

The plan, the Options Regulatory Surveillance Authority (ORSA), was recently approved by the Securities and Exchange Commission.

"This idea has been around for years and now we finally put it together," Timothy Thompson, chief regulatory officer for the CBOE, told Traders Magazine. "We will pool our resources and will save a lot of money."

The ORSA plan calls for the exchanges to enter into a regulatory services agreement with CBOE. The plan defines insider trading as "the detection of the unlawful use of undisclosed material information in the trading of securities options on one or more of the markets maintained by the parties to the Plan."

ORSA will provide its automated insider trading surveillance service to all of the exchanges. Still, each exchange will remain responsible for regulation and for bringing enforcement actions against members, according to the plan. Thompson says the exchanges only have the authority to investigate illegal actions against exchange members. However, they will turn over any other illegal insider trading activity information to the SEC, he added.

The six exchanges will split the plan costs. Any exchange can withdraw from the plan, which will remain effective as long as at least two exchange stay in ORSA.

The six exchanges in ORSA are: CBOE; the American Stock Exchange; BOX, part of the Boston Stock Exchange; the International Securities Exchange; the Philadelphia Stock Exchange; and the Pacific Stock Exchange, part of New York Stock Exchange Group's Archipelago subsidiary.

These exchanges represent 100 percent of the listed options business in the United States, according to a CBOE spokesman. He added that the six exchanges traded 200 million listed options contracts in May.