Principal counterparties to a potential block trade may engage in pre-hedging, or anticipatory hedging, of the position that they believe will result from the consummation of the block trade.

However, this does not apply to intermediaries that take the opposite side of their customer orders; the intermediary may enter transactions to offset the position only after the block has been consummated.

Prior to the consummation of the block trade, the intermediary is prohibited from offsetting the position established by the block trade in any account which is owned or controlled, or in which an ownership interest is held, or for the proprietary account of the employer of such intermediary.

Prohibited Use of Non-Public Information

It is important to note that pre-hedging is different than front running. It is a violation of Rule 526 for a person to engage in the front running of a block trade when (1) acting on material nonpublic information regarding an impending transaction by another person, (2) acting on nonpublic information obtained through a confidential employee/employer relationship, broker/customer relationship, or (3) in breach of a pre-existing duty.

Parties privy to non-public information regarding a consummated block trade may not disclose such information to any other party prior to the public report of the block trade by the exchange. However, parties solicited to provide a two-sided block market are not deemed in possession of non-public information, provided side-of-market interest is not disclosed in the context of the solicitation.

This is part of a course on block trades. For official regulatory guidance on block trades, reference the applicable Market Regulation Advisory Notice.

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