Chicago Merc Backs NYSE Stand on ‘Front-Running’

The Chicago Mercantile Exchange said Tuesday that it supports the New York Stock Exchange’s position that intermarket front-running from stock to futures exchanges violates its rules.

Front-running occurs when an individual or firm trades futures in anticipation of a large, potentially market-moving order in the stock market.

The NYSE said Monday that it plans to tell its members that front-running violates the exchange’s trading rules.

Gerald Beyer, senior vice president for the Merc’s legal and regulatory division, said in a statement that the NYSE position is “consistent with our position respecting intermarket front-running, which we expressed in a letter to the Commodity Futures Trading Commission in early 1987.

“We are also pleased that the New York Stock Exchange is at last prepared to furnish us with the information necessary to detect intermarket front-running.”

Intermarket front-running emerged as an issue in the wake of the October stock market crash. Congressional interest in the subject arose due to reports on the crash by Nicholas Brady’s presidential task force and the Securities and Exchange Commission, which both said the area should be investigated.

Senate hearings on front-running and other trading abuses may be held later this month.

Front-running is not specifically forbidden in all markets. The SEC has said that it cannot pursue the activity because it involves the trading of futures, not securities.

The Commodities Futures Trading Commission has never brought a case of intermarket front-running, but CFTC Chairwoman Wendy Gramm recently told Congress that her staff is looking into the possibility of prohibiting the activity.