FINRA’s New Rule Against Front-Running Block Trades Includes Derivatives
FINRA’s new rule prohibiting front-running of customer block transactions was approved by the SEC and takes effect of June 1, 2013. Revised rule 5270 expands previous prohibitions by including restrictions on “related financial instruments” (aka derivatives). The rule prohibits firms from placing trades when the firm has information of an imminent block transaction of more than 10,000 shares. FINRA makes clear that front-running of any kind (even if not a block trade) could violate other FINRA rules such as 2010 (Principles of Honor and Trade) and 5320 (Trading Ahead of Customer Orders). The new rule includes certain permitted transactions: where information barriers restrict sharing of information, transactions that facilitate customer orders, and transactions in compliance with the rules of a national securities exchange.