[Federal Register: November 26, 2002 (Volume 67, Number 228)]
[Notices]
[Page 70788-70793]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr26no02-96]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-46849; File No. SR-Amex-2001-85]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change and Amendment Nos. 1 and 2 by the American Stock Exchange LLC,
Relating to the Amex's Front-Running Rule
November 19, 2002.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on October 15, 2001, the American Stock Exchange LLC (``Amex'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'' or ``SEC'') the proposed rule change as described in
Items I, II, and III below, which Items have been prepared by the
Amex.\3\ The Commission is publishing this notice to solicit comments
on the proposed rule, as amended, change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ On February 4, 2002, the Amex filed Amendment No. 1 to the
proposal. Amendment No. 1 clarifies the proposal by indicating that
the proposal does not change either paragraph (d) of Commentary .03
to Amex Rule 111, ``Restrictions on Registered Traders,'' or
Commentary .05 to Amex Rule 950(d). On November 7, 2002, the Amex
filed Amendment No. 2 to the proposal. Amendment No. 2 includes an
Amex Notice that provides examples and interpretations of the
operation of the proposed rule.
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[[Page 70789]]
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Amex proposes to amend Amex Rules 24, ``Block Transactions,''
111, ``Restrictions on Registered Traders,'' 175, ``Specialist
Prohibitions,'' and 950, ``Rules of General Applicability,'' to develop
a single comprehensive rule with respect to front-running. The Amex has
submitted a Notice (``Amex Notice''), attached hereto as Exhibit A,
that provides examples and interpretations of the operation of the
proposed rule.
The text of the proposed rule change appears below. Proposed new
language is in italics; proposed deletions are in brackets.
Block Transactions
Rule 24. Rescinded [(a) After learning in any way about any trade
in any security executed or about to be executed on the Floor of the
Exchange involving 10,000 shares or more, no member or employee of a
member or member organization may initiate or transmit or cause to be
transmitted to the Floor, for a period of two minutes following the
print of such trade on the ticker tape, an order in the same security
for an account in which any member or member organization or employee
thereof has an interest. This does not preclude the supplying from the
Floor of quotations and size of the market in a particular security or
securities when such information has been requested, or when such
information is furnished in the normal course of business in servicing
public customers. The period during which the order may not be entered
or transmitted to the Floor will be measured from the time of learning
of the trade or proposed trade until the expiration of two minutes
following the print of such trade on the tape, or until the expiration
of two minutes following the print of the first of any series of
transactions of 10,000 shares or more at the same price as the initial
block.
(b) The restrictions of paragraph (a) shall not apply to:
(i) An order entered for the purpose of participating in the
purchase or sale of the particular block about which the member or
employee has learned;
(ii) A situation where a Floor Official expressly invites a member
to participate in a difficult market situation;
(iii) An order to reduce or liquidate a position acquired pursuant
to subparagraph (i) or (ii);
(iv) A bona fide arbitrage transaction or a transaction which is
part of a purchase and sale or sale and purchase of securities of
companies involved in a publicly announced merger, acquisition, tender
offer, etc.;
(v) A transaction to offset a transaction made in error.]
* * * * *
Restrictions on Registered Traders
Rule 111(a) through (h) No change.
* * * Commentary
.01 and .02 No change.
.03(a) and (b) No change.
(c) [No member or member organization shall execute or cause to be
executed, on the Exchange, any order for any account in which such
member, member organization, or any member, allied member, or approved
person in such organization or officer or employee thereof, is
interested or for any discretionary account serviced by the member or
member organization, in contravention of any Exchange policy against
front-running of transactions that the Exchange may from time to time
adopt and make known to its members.] Front-Running Policy. If a member
or person associated with a member or member organization executes or
causes to be executed for an account in which such member, member
organization or person has a direct or indirect interest or for an
account with respect to which such member or person exercises
investment discretion, any transaction to take advantage of material,
non-public information which can reasonably be expected to have an
immediate, material and favorable impact in relation to any such
transaction, such member, member organization or person may be in
violation of just and equitable principles of trade (Article V, Section
4(h)). Such transactions include, but are not limited to:
(i) A transaction in the same security when such member or person
has acquired knowledge of the imminent execution of an order expected
to have an immediate, material and favorable impact in relation to the
member's or person's transaction;
(ii) A transaction in any security-future product or option on a
stock or stock index when such member or person has acquired knowledge
of the imminent execution of a stock or stock program transaction
expected to have an immediate, material and favorable impact in
relation to the member's or person's transaction;
(iii) A transaction in any option on a stock or stock index or in a
stock or stock program, when such member or person has acquired
knowledge of the imminent execution of a transaction in any futures,
stock index futures, or security-futures product expected to have an
immediate, material and favorable impact in relation to the member's or
person's transaction;
(iv) A transaction in any security-future product or in a stock or
stock program, when such member or person has acquired knowledge of the
imminent execution of a transaction in any option on a stock, index, or
futures expected to have an immediate, material and favorable impact in
relation to the member's or person's transaction.
Notwithstanding the foregoing, a member, member organization or
person associated with a member organization who implements a
proprietary market strategy involving, for example, a stock program and
a related stock index options transaction by executing the stock index
options trade(s) prior to the execution of the stock program will not
be deemed to be in violation of this policy. The Front-Running Policy,
however, does not create a ``safe harbor'' with respect to other
possible violations of the Exchange's rules or federal securities laws.
For example, if the member, member organization or person executes or
causes to be executed a transaction in one market to take advantage of
such member's, member organization's or person's imminent transaction
in a related market, that member, member organization or person may be
engaging in manipulative activity in violation of Exchange rules and
federal securities laws.
In determining whether a member, member organization or person has
taken advantage of material, non'public information, it is not
necessary for the Exchange to demonstrate that another person has been
disadvantaged. Further, such member, member organization or person may
be in violation of just and equitable principles of trade regardless of
whether any person who may have been disadvantaged has given permission
for such trading. The information, however, will only be considered
non-public until either (i) all the information and any changes thereto
of which that member or associated person has knowledge are disclosed
to the trading crowd or (ii) the information can no longer reasonably
be expected to have an immediate, material and favorable impact in view
of the passage of time since the information was received.
For the purposes of this Rule, a person may be deemed to have
caused a trade to be executed on the basis of material non-public
information if such person transmits information regarding trade
negotiation on the Floor so that a
[[Page 70790]]
transaction may be effected in another market center to take advantage
of the immediate, material and favorable impact reasonably expected to
result from such trade negotiation. Further, this could be the case
even if the trade negotiations do not result in a transaction.
This Rule shall apply to any agency or proprietary transaction
effected on the Exchange. This is the case if: (i) such transaction
(``Exchange transaction'') is part of a group of related transactions
that together have the effects prohibited by the Rule regardless of
whether one or more of the other related transactions were effected on
other market centers; or (ii) the Exchange transaction by itself had
such effects. Further, a member who issues a commitment or obligation
to trade from the Exchange through ITS or any other Application of the
System shall, as a consequence thereof, be deemed to be initiating a
purchase or sale of a security on the Exchange as referred to in this
Rule.
(d) No change.
.04 through end. No change.
* * * * *
Specialist Prohibitions
Rule 175. (a) through (c) No change.
Guidelines for Specialists' Specialty Stock Option Transactions
Pursuant to Rule 175 (a) through (f) No change.
(g) Prohibition Against Front-Running of Blocks
[In Information Circulars No. 82-37, No. 85-115 and No. 99-147
(dated July 6, 1982, November 29, 1985 and September 14, 1990
respectively), the Exchange advised members and member organizations
that they should not trade in options or in underlying securities by
taking advantage of their possession of material, non-public
information concerning block transactions in these securities. The
Exchange noted that it would be improper for a member or person
associated with a member who has knowledge of a block transaction in
any security underlying an option or of a block transaction in the
option covering that security, before information concerning the block
transaction has been made publicly available, to take advantage of the
non-public information in his possession and execute or cause to be
executed an order (1) to buy or sell an option, while in possession of
non-public information concerning a block transaction in the underlying
stock, or (2) to buy or sell an underlying security, while in
possession of non-public information concerning a block transaction in
an option covering that security, for an account in which such member
or associated person has an interest or for an account with respect to
which such member or associated person exercises investment
discretion.] The prohibitions against front-running stated in [such
Information Circulars] Rule 111, Comm. .03(c) shall take precedence
over any requirements stated in these Guidelines. Thus, a specialist
may not establish an offsetting option position in a specialty stock if
he is in possession of material, non-public information in any way
concerning [a block transaction in] such stock.
(h) through (l) No change.
* * * * *
Rules of General Applicability
Rule 950 (a) through (c) No change.
(d) No change.
* * * Commentary
.01 through .03 No change.
.04 Rescinded [It may be considered conduct inconsistent with just
and equitable principles of trade for any member or person associated
with a member, who has knowledge of all material terms and conditions
of (i) an originating order and a solicited order, (ii) an order being
facilitated, or (iii) orders being crossed, the execution of which are
imminent, to enter, based on such knowledge, an order to buy or sell an
option of the same class as any option that is the subject of the
order, or an order to buy or sell the security underlying such class,
or an order to buy or sell any related instrument until either (i) all
the terms of the originating order and any changes in the terms and
conditions of the order of which that member or associated person has
knowledge are disclosed to the trading crowd or (ii) the trade can no
longer reasonably be considered imminent in view of the passage of time
since the order was received. For purposes of this Commentary .04, an
order to buy or sell a ``related instrument,'' means, in reference to
an index option, an order to buy or sell securities comprising ten
percent or more of the component securities in the index or an order to
buy or sell a futures contract on any economically equivalent index.]
.05 No change.
(e) through end. No change.
* * * * *
(b) Not applicable.
(c) Not applicable.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Amex included statements
concerning the purpose of, and basis for, the proposed rule change, and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Amex has prepared summaries, set forth in Sections
A, B, and C below, of the most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
(1) Purpose
In the past, the Amex has adopted three rules and one guideline and
issued no fewer than five Information Circulars expressing the
prohibition against using non-public market information (``front-
running'').
With some exceptions, Amex Rule 24 prohibits proprietary trades on
the Amex floor in equities for two minutes after the tape print of a
10,000-share block on the Amex floor in the same equity. When the Amex
adopted Amex Rule 24 in 1971, the Amex only traded equities, and Amex
Rule 5, ``Over-the-Counter Execution of Equity Securities
Transactions,'' (limiting off-Board trades) was in place. Accordingly,
Amex Rule 24 is limited to trades in equity securities occurring on the
Amex.
Subsequently, the Amex adopted Amex Rule 111, Commentary .03(c),
which prohibits proprietary or discretionary transactions in violation
of the Exchange's policies against front-running. The Exchange issued
five Information Circulars to express the policy against front-
running.\4\
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\4\ Specifically, Information Circular 79-12 prohibited
proprietary options transactions front-running block transactions in
the underlying security. Information Circular 80-36 prohibited
proprietary and agency options transactions front-running block
transactions in the underlying security as well as equity
transactions front-running option blocks. Information Circular 82-37
alerted the membership to disciplinary action taken for options
transactions front-running block facilitations in the underlying
securities. Information Circular 85-115 prohibited transactions in
index options front-running block transactions in the underlying
component securities. Information Circular 90-147 prohibited
transactions in index warrants front-running block transactions in
the underlying component securities.
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Paragraph (g) of the ``Guidelines for Specialists' Specialty Stock
Option Transactions Pursuant to Rule 175'' applies the front-running
prohibitions to equities specialists in connection with their option
trades.
In June 2000, the Amex adopted Rule 950(d), Commentary .04, which
prohibits proprietary front-running of solicited, facilitated, and/or
crossed options transactions with an order to buy or sell an option of
the same class, an order to buy or sell the underlying
[[Page 70791]]
security of such class, or an order to buy or sell any related
instrument.
According to the Amex, these rules and policies developed over time
in response to specific needs and are not comprehensive in that they
only address certain types of information, specified markets, and/or
particular products. For example, Amex Rule 24 prohibits only an equity
trade on the Amex that is effected with knowledge of an impending
equity block trade also effected on the Amex.
In the course of preparing proposed rules to accommodate the
introduction of single stock futures, the Amex realized that its
current rules relating to front-running did not cover this new product,
and that this served as an occasion to review more generally the Amex's
rules governing front-running and related activity. As a result of this
review, the Exchange determined that the Amex, its members, and the
public would be better served by a front-running rule that was more
comprehensive and broader conceptually than the several separate rules
and interpretations that the Exchange had adopted and issued over the
years.
Accordingly, the proposal has been drafted to clarify that front-
running in any ``securities'' product in any transaction by Amex
members or member organizations involving the Amex's market in any way
is prohibited. The Exchange also has prepared an ``Amex Notice,''
attached as Exhibit A, that the Amex intends to issue to members and
member organizations following Commission approval of the proposed rule
change.
(2) Basis
The Amex believes that the proposed rule change is consistent with
Section 6(b) of the Act, in general, and furthers the objectives of
Section 6(b)(5), in particular, in that it is designed to prevent
fraudulent and manipulative acts and practices, to promote just and
equitable principles of trade, to remove impediments to and perfect the
mechanism of a free and open market and a national market system, and,
in general, to protect investors and the public interest; and is not
designed to permit unfair discrimination between customers, issuers,
brokers, and dealers.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Amex believes that the proposed rule change will impose no
burden on competition.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were solicited or received with respect to the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 35 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the Exchange consents, the Commission will:
(A) By order approve such proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change and Amendment Nos. 1 and 2 are consistent with the Act. Persons
making written submissions should file six copies thereof with the
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW.,
Washington, DC 20549-0609. Copies of the submission, all subsequent
amendments, all written statements with respect to the proposed rule
change that are filed with the Commission, and all written
communications relating to the proposed rule change between the
Commission and any person, other than those that may be withheld from
the public in accordance with the provisions of 5 U.S.C. 552, will be
available for inspection and copying in the Commission's Public
Reference Room. Copies of such filing will also be available for
inspection and copying at the principal office of the Amex. All
submissions should refer to file number SR-Amex-2001-85 and should be
submitted by December 17, 2002.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\5\
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\5\ 17 CFR 200.30-3(a)(12).
Jill M. Peterson,
Assistant Secretary.
Exhibit A
Member Firm Regulation
Amex Notice
Date:
To: Members and Member Organizations
From:
Subject: Revised Front-Running Rule
The Exchange recently received SEC approval to consolidate and
update our front-running rules and policies. The text of the revised
rule, Rule 111, Commentary .03(c), is attached. The revised rule
(the ``Rule'') is designed to cover all types of front-running.
Accordingly, Rules 24 and 950(d), Commentary .04, which also dealt
with front-running, have been rescinded. The Rule prohibits any
front-running involving a trade executed or attempted on the Amex or
executed or attempted in any other market based on market
information obtained on the Amex or advanced knowledge of other
material non-public information. The foundation of the Exchange's
front-running prohibition is that it is a violation of just and
equitable principles of trade for a person with material non-public
information of the pending release of news or an imminent
transaction in a security to take advantage of that information by
effecting trades in that security or related securities. In the
past, it has been most common to think of front-running in terms of
options trades executed in front of a block trade in the underlying
stock. And we expect questions about front-running will continue to
arise most often in that context. However, the revised Rule
encompasses the possibility that any imminent, significant
transaction in a security (e.g., common stock, options, security
futures product, or stock index product) or in stock index futures
could have an impact on the price of that security and related
securities. Front-running occurs when a person takes advantage of
non-public information about such a transaction. Front-running can
also arise when a person takes advantage of advanced knowledge of
research reports, corporate news or other material non-public
information. The purpose of this notice is to provide
interpretations and examples to clarify these and other aspects of
the Rule.
Terms
Any Transaction
Typically, only a block (e.g., 10,000 shares or more) or
equivalent-sized transaction in an equity, option or security
futures product will trigger application of the Rule. A sequence of
transactions that aggregate to block size for the same or related
accounts can also trigger the Rule. The trades that take advantage
of the triggering transaction need not be of block size. Front-
running can also arise from advanced knowledge of research
[[Page 70792]]
reports, corporate news or other material non-public information.
Transactions that take advantage of such information must be
``purposeful''. For example, in the case of research reports,
trading activity establishing, increasing, decreasing, or
liquidating a position in a security in anticipation of the issuance
of a research report in that security is inconsistent with just and
equitable principles of trade to the extent that the trading is for
the purpose of profiting (or avoiding losses) from the report's
anticipated impact on the market. Trading activity is ``purposeful''
if it is undertaken with the intent of altering a firm's position in
a security to take advantage of the investor interest that is
anticipated on publication of the research report. Hence, trading
activity generally would not violate the Rule if it was conducted
while effective information barriers (i.e., ``Chinese Walls'') were
in place between trading and research, it was done in response to
unsolicited customer orders or the trading was based on research
done solely for in-house use and was not in any way intended for
external publication. (This interpretation is derived from language
in NASD IM-2110-4.)
Non-Public Information
Market information will be considered non-public until either
(i) the information and any changes thereto are disclosed to the
trading crowd or (ii) the information can no longer reasonably be
expected to have an immediate, material and favorable impact in view
of the passage of time since the information was received. Corporate
information and research reports will be considered non-public until
either (i) the information and any changes thereto have been
disclosed to the public (via a news service or similarly widespread
method of information dissemination) and a reasonable period of time
has elapsed for the information to be comprehended or (ii) the
information can no longer reasonably be expected to have an
immediate, material and favorable impact in view of the passage of
time since the information was received.
Immediate, Material and Favorable Impact
Immediate impact means that, as soon as it is released, the
information (corporate news, research report, order to be executed,
etc.) itself would, upon release, be expected by a reasonable market
professional to have an impact on the price of any security in which
a front-running transaction was effected.
Material means that the information would be considered
important by a reasonable market professional in relation to the
security in which a front-running transaction was effected.
Favorable means that the information will cause a price movement
in the direction needed to profit from (or avoid a loss through) the
front-running transaction.
Acquired Knowledge
For purposes of this Rule, ``acquired knowledge'' means both
obtaining information and understanding its importance. Violation of
the Rule requires the purposeful use of the information obtained by
the member or associated person for personal gain, to benefit a firm
account, or to ``tip'' another person. A member or associated person
will not be presumed to have acquired knowledge of non-public
information if the information is possessed by an affiliate on the
other side of an effective information barrier (i.e., ``Chinese
Wall'').
``Related'' Security
The following are examples of groups of securities which are
related to each other:
1. The underlying stock(s)
Listed options on that stock
Single-stock future on that stock
Any index in which the stock comprises 10% or more of the index
value
Any equity-linked term notes (derivative products based on
performance of the underlying stocks) such as STRIDESSM
or SPARQSSM
Any index-linked notes (such as MITTS[reg]) in which the
underlying stock comprises 10% or more of the index value
2. An Exchange Traded Fund (``ETF'': e.g., Portfolio Depositary
Receipts and Index Fund Shares) or a similar equity-traded
derivative or Trust Issued Receipts (``TIR'': e.g., a
HOLDRSSM or similar product)
Component stocks comprising, at least, 10% of the NAV of the ETF
or TIR
Listed option on the ETF or TIR
Listed option on component stock(s) comprising, at least, 10% of
the NAV of the ETF or TIR
Futures contracts on the ETF or TIR, or single stock futures on
component stock(s) comprising, at least, 10% of the NAV of the ETF
or TIR
Any related index, ETF or TIR (which share, to any degree,
underlying component stocks) plus all securities related to that
related index, ETF or TIR
A Proprietary Market Strategy (so-called ``self Front-Running'')
Example: Believing a stock to be undervalued, a trading desk
buys the stock, its call options, and its single stock futures. The
trader on the desk knows that purchases in one market can be
expected to raise the price in the related products. Regardless of
the timing or sequence of transactions in these various products,
these purchases, to take advantage of the perceived under-valuation
of the security, could constitute an acceptable market strategy. The
presence of other factors, however, might cause this conduct to be
violative activity.
Does Not Create a ``Safe Harbor''
Even though ``self front-running'' is not a violation of the
front-running Rule, that doesn't mean trades done in anticipation of
additional activity in a stock or related security may not
constitute manipulation or other violative activity.
Example: A trading desk determines to buy 100,000 shares of a
stock, knowing that the purchase can be expected to raise the
stock's price. Accordingly, and immediately before buying the stock,
the desk buys 500 calls and sells 500 puts. After the stock purchase
causes the stock price to rise, the desk liquidates the options
positions at a profit. While this activity would not violate the
front-running prohibition, it would raise manipulation concerns.
Customer May Not Give Permission
Example: An institutional customer asks its broker where it can
buy 100,000 shares of XYZ. The brokerage house says it can supply
the stock up $1 from the last sale, but, if the customer allows the
house to buy calls or sell puts first, it can supply the stock to
the customer up only 50[cent]. The customer agrees, and the house
buys 1,000 calls or sells 1,000 puts on the Amex before crossing
100,000 shares up 50 [cent]. This is prohibited front-running.
Customer permission does not excuse the violation.
Transactions
In the Same Security
After learning in any way about an imminent trade in a security
about to take place on the Amex Floor that is expected to have an
immediate, material and favorable impact, no member or employee of a
member or member organization (``member'') may initiate or transmit
or cause to be transmitted to the Floor or to any other market place
an order in the same security for an account in which any member or
member organization or employee thereof has a direct or indirect
interest or for an account with respect to which such member or
person exercises investment discretion (collectively, a ``member
account'') until such time as the information concerning the trade
is no longer non-public. Similarly, after learning in any way about
such an imminent trade in another market, no member may initiate or
transmit or cause to be transmitted to the Amex Floor an order in
the same security for a member account until information concerning
the trade is no longer non-public. This would not, of course,
preclude a legitimate, proprietary market activity (such as block
facilitation) or a legitimate, proprietary market strategy.
Example: An Amex floor broker overhears a second floor broker at
an adjacent booth accept an order to execute a facilitation of
100,000 shares of an inactive stock up $2 from the current offer.
Before the facilitation trade is executed, the first floor broker
places orders to buy the stock at the current offer price on two
ECNs and one regional exchange. These orders are prohibited front-
running.
In any Security Future Product or Option on a Stock or Stock Index
Related to the Imminent Execution of a Stock or Stock Program
Transaction
Same concept as that described above in the section titled ``In
the Same Security'' except this section deals with a combination of
related securities.
Example: After receiving an institutional order to buy a basket
of the components of an index expected to have an immediate,
material and favorable impact on the prices of the component stocks,
but before executing the program order, a brokerage house buys an
equivalent amount of the calls or sells an equivalent amount of puts
overlying that index on the Amex. This is prohibited front-running.
[[Page 70793]]
A Transaction in any Option on a Stock or Stock Index or in a Stock
or Stock Program Related to the Imminent Execution of a Transaction
in any Futures, Stock Index Futures, or Security Futures Product
(Including Single Stock Futures)
Same concept as that described above in the section titled ``In
the Same Security'' except this section deals with a combination of
related securities.
Example: After receiving an institutional order to sell 1,000
futures contracts on a stock expected to have an immediate, material
and ``favorable'' impact on the price of the futures and related
securities, but before representing the order in the pit, a
brokerage house buys put or sells call options on the stock on the
Amex. This is prohibited front-running.
A Transaction in any Security Futures Product or in a Stock or
Stock Program Related to the Imminent Execution of a Transaction in
any Option on a Stock, Index, or Futures
Same concept as that described above in the section titled ``In
the Same Security'' except this section deals with a combination of
related securities.
Example: After being solicited to participate as seller in a
1,000-contract transaction in near-term, at-the-money calls of XYZ
expected to have an immediate, material and ``favorable'' impact on
the price of XYZ stock, but before the options trade is presented to
the Amex crowd, the solicited broker/dealer buys an equivalent
number of XYZ single-stock futures and/or XYZ shares in the ``cash''
market. (This is sometimes known as ``run fronting'' and violates
our rules.)
Example: After being solicited to participate as buyer in a
5,000-contract transaction in puts of ZYX expected to have an
immediate, material and ``favorable'' impact on the price of ZYX
stock, but before the options trade is presented to the CBOE crowd,
the solicited broker/dealer sells an equivalent number of ZYX shares
on the Amex. (This is also known as ``run fronting'' and violates
our rules.)
Example: A member executes a 2,500 contract futures transaction
on XYZ stock on a futures market at a price $1 above the current
market. Before that trade is printed, the member takes an offer to
buy non-fungible futures on XYZ traded on the Amex. This is
prohibited front-running.
Transactions Covered But Not Expressly Enumerated in the Rule
Example: After receiving an institutional order to buy on the
Amex 100,000 shares of a HOLDRS, which order is expected to have an
immediate, material and favorable impact on the price of the HOLDRS
and related securities, but before representing the order in the
crowd, a brokerage house buys on the offers on another exchange
shares in (10) component stocks which comprise 50% of the HOLDRS.
This is prohibited front-running.
[FR Doc. 02-29947 Filed 11-25-02; 8:45 am]
BILLING CODE 8010-01-P