FINRA Rule 5270 – Front Running
The Financial Industry Regulatory Authority, Inc. (“FINRA”) and the various U.S. exchanges have had longstanding policies expressly prohibiting front running in equities stock and options products as well as principles of fair dealing generally governing market trading activities. Effective September 3, 2013, FINRA adopted FINRA Rule 5270 (“the Rule”) to harmonize and expand upon existing interpretative guidance and policies. The Rule generally prohibits a trading unit of RBC from executing for its own account in any security or related financial instrument while that trading unit has detailed order information regarding an imminent block sized transaction in the same security or related financial instrument.1
To prevent the internal disclosure of customer order information the Firm utilizes a system of information barriers between separate and distinct trading units. However, the Firm’s information barriers may allow separate and distinct trading units to trade for its own account in the same security or related financial instrument while another trading unit of RBC is in possession of detailed order information regarding an imminent block sized transaction.
In addition, the Rule allows RBC to execute certain “Permitted Transactions” as outlined in the Rule while in possession of detailed order information regarding an imminent block sized transaction in the following limited circumstances:
- transactions undertaken to facilitate the execution of your block sized order;
- transactions that are executed, in whole or in part, on a national securities exchange and comply with the marketplace rules of that exchange;
- transactions effected to satisfy a prior customer order;
- transactions to correct a bona-fide error; and
- transactions executed to offset customer odd-lot orders.
To the extent a trading unit of RBC has possession of detailed order information regarding an imminent block sized transaction in the same security or related financial instrument and executes a Permitted Transaction as outlined in the Rule and summarized above, RBC will seek to minimize any potential disadvantage or harm in the execution of your order. In the event your firm objects to any of the aforementioned order handling practices, please indicate this to us in writing at your earliest convenience. If you have any questions about this notice, please contact your RBC Sales Coverage for additional information.
1 The Rule defines a “related financial instrument” as any option, derivative, security-based swap, or other financial instrument overlying a security, the value of which is materially related to, or otherwise acts as a substitute for, such security, as well as any contract that is the functional economic equivalent of a position in such security.