Belenke v. Securities and Exchange Commission

At the Chicago Board Options Exchange, Inc. (CBOE), board brokers were persons who performed similar functions as buyer’s or seller’s agents except that board brokers were permitted to deal only with a specified class of options. For that class of options, the board broker’s job was to maintain the public limit order book (LOB). The LOB was comprised of orders to buy or sell an option at a specified price rather than at the prevailing market price. Only if and when the prevailing market price matched the limit order would those limit orders be executed. A floor broker could pay a fee to board brokers so that the floor broker’s limit orders had priority over other limit orders at the same price. The CBOE proposed an amendment to its rules that would replace board brokers with CBOE employees; such an employee would be known as an order book official (OBO). The OBOs would be compensated at a fixed rate, as opposed to receiving compensation from floor-broker fees. In the CBOE’s opinion, this system would provide the CBOE with better control over the LOB services, particularly when there was floor stress or congestion. For instance, the CBOE wished to be able to transfer option classes from one OBO to another if necessary and to have other flexibility pertaining to the limit order system. The Securities and Exchange Commission (SEC) (defendant), pursuant to the Securities Exchange Act of 1934 (Exchange Act), undertook a review of the proposed amendment. The SEC provided notice and opportunity for written comment, at which point a coalition of board brokers known as the Board Brokers Association (BBA) (plaintiff) filed a thorough written opposition. The BBA argued that the proposed amendment was inconsistent with the Exchange Act, including by stifling competition and unfairly discriminating against board brokers. The SEC considered the written comments, including the BBA’s opposition, and found that the proposed amendment was consistent with the Exchange Act. The SEC opined that the CBOE’s proposal to assume more direct control of the LOB through OBOs would enable the CBOE to provide limit order services to its members more efficiently. The SEC concluded that the proposed amendment would not stifle competition and that even if it did have an anticompetitive effect, such effect was outweighed by the other goals of the proposal, such as greater market efficiency. The SEC approved the amendment. The BBA petitioned for review of the SEC’s approval of the proposed amendment. The BBA argued that the order approving the proposed amendment had to be set aside as inconsistent with the Exchange Act. Among other arguments, the BBA contended that the SEC’s findings were not supported by substantial evidence in the record.