[Federal Register Volume 67, Number 228 (Tuesday, November 26, 2002)]
[Notices]
[Pages 70788-70793]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-29947]


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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 Rescinded [(a) After learning in any way about any trade 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