Exchanges feel the gaze of regulators
From 911myths
October 1, 2001
Exchanges in US and Europe feel the gaze of regulators
BYLINE: NATASHA DE TERAN
Exchanges in Chicago, Frankfurt and London are working with their regulators to establish whether they processed in advance any derivatives trades linked to the terrorist attacks in the US.
The Chicago Board Options Exchange (CBOE), Swiss-German exchange Eurex, the London International Financial Futures and Options Exchange (Liffe) and the International Petroleum Exchange are all looking at trades executed on their exchanges before the attacks.
The regulators are believed to be examining potentially suspicious put options in airline and reinsurance stocks.
Put options are essentially bets that a stock price will fall significantly within a certain timeframe.
Their value rises when a stock falls, enabling investors to profit from a stock's decline.
The CBOE and Eurex are bearing the brunt of the investigations.
The CBOE reacted almost instantly after the attacks, beginning its investigation the following day.
The exchange is now working with a multi-agency taskforce including the US Securities and Exchange Commission.
Both the CBOE and the SEC refused to provide details of their investigations.
However, it is likely their interest was highlighted by a large volume of put options bought for United and American Airlines during the three trading days before the attacks.
Planes from both airlines were crashed into the World Trade Center and the Pentagon.
Shares in both airlines fell heavily on the first day the stock market opened after the attacks.
As a result, the owners of the puts would have been able to realise a substantial profit.
However, US stock and futures markets were closed for four days following the attacks, during which time regulators began to scrutinise trades.
As a result, any traders trying to cash in their puts would have done so under the full scrutiny of the investigating bodies.
In Germany, a number of options whose underlying stocks were materially affected by the US attacks are listed on Eurex, including those on reinsurers Swiss and Munich Re.
On September 6, Eurex traded 5,189 options on Munich Re compared with the year's daily average of 2,890.
There were six times more puts traded than calls.
Eurex's supervisory body, the HandelsAberwachungdstellen, also launched its own investigation in the aftermath of the event and is now working together with the Bundesaufsichtsamt fAr den Wertpapierhandel, or Bawe, the German securities industry regulator.
A spokesperson for Bawe said that nothing had yet been found to confirm suspicions of terrorist-linked trades.
'We are still in the process of investigating this case, but do not have any proof or evidence of insider trading connected to the terrorist attack and have so far found no factual evidence which suggests anyone traded with prior information,' he said.
In the UK, the Financial Services Authority is looking into all Liffe and IPE trades, as well as London Stock Exchange transactions.
It is also looking at over-the-counter deals made by UK-registered institutions.
An FSA spokesperson said the study was continuing, but that nothing unusual had yet been found.
Unlike Eurex, few options are traded on Liffe whose underlying securities would have been substantially affected by the tragedy.
Although there was heavy trading in put options on British Airways prior to the attack, the FSA has played down the suspiciousness of the trades.
The supervisor said: 'A sizeable put option trade in the shares of a British airline turned out to have been on behalf off another airline, as part of an overall hedging strategy.'
In the weeks prior to the attack there was a mild increase in Brent Crude futures traded on the IPE.
However, according to one market specialist, there was 'nothing unusual in the increase or trading levels'.
He added that the pick-up in trading volumes 'could be accounted for by the usual growth in activity following the end of the summer period'.
