Pre-attack trading probed: Regulators in U.S., Europe and Asia check put options
BYLINE: JUDY MATHEWSON and MICHAEL NOL
SOURCE: Bloomberg News
SECTION: BUSINESS: TECHNOLOGY, Pg. D1 / BREAK
The Chicago Board Options Exchange, the biggest U.S. options market, said yesterday that it is investigating trading that happened before terrorist attacks that flattened New York's World Trade Centre and damaged the Pentagon.
The prospect that terrorists might have profited from advance knowledge about the assaults also is being investigated by securities regulators in the U.S., Europe and Asia.
Trading in some so-called put options, which rise in value when stock prices fall, surged as much as 285 times the previous average volume in airlines UAL Corp. and AMR Corp. during the days before terrorists used hijacked United and American jets as weapons against the centre's twin towers and the Pentagon.
"The CBOE is conducting an investigation of trading prior to the news event," said CBOE spokesman Lynne Howard.
She declined to provide more detail or say what options are being examined.
Options volume also jumped at some insurers and at brokerages affected by the attacks. Morgan Stanley Dean Witter & Co., which occupied 22 floors of the 110-storey 2 World Trade Centre, experienced pre-attack trading of some put options that was more than 25 times the usual volume.
"We've heard those reports about terrorist involvement in our markets," U.S. Securities and Exchange Commission chairman Harvey Pitt said in a statement. "Our enforcement division has been looking into a variety of market actions that could be linked to these terrible acts, including the subjects of the rumours."
World's Regulators Confer
Securities regulators from around the world gathered Monday on a conference call to discuss efforts to investigate possible terrorist insider-trading, said Sabine Reimer, spokesman for BaWe, the German regulator.
"We wanted to exchange information concerning trading before the attack in the U.S. last Tuesday," Reimer said. The call was organized by the Madrid-based International Organization of Securities Commissions, she said. "We usually hold conference calls among regulators once a year."
U.S. Representative John LaFalce of New York, the ranking Democrat on the House Financial Services Committee, wrote Pitt yesterday, encouraging the SEC to ask for additional authority or funding needed to track possible terrorist trading.
"To the extent that individuals or entities have manipulated the broader markets or have successfully devised schemes to profit from acts of terror, the SEC must use all its resources to find those responsible," LaFalce wrote.
The erratic nature of options trading might make it difficult to establish a link between higher-than-average activity and the terrorism attacks, analysts said.
"You shouldn't jump to a conclusion, but it's a conclusion that's easy to make," said Marco Van Diesen, head of the derivatives trading desk at Van Lanschot NV in the Netherlands, speaking of the volume of option trades in UAL and AMR.
Deutsche Boerse AG spokesman Frank Hartmann said that exchange and German regulators are examining trading in stocks, options and futures before the Sept. 11 attack. On Sept. 6 and Sept. 7, trading almost doubled the average for the past six months in shares of Munich Re, the biggest reinsurer. Initial spot checks had found nothing irregular, Hartmann said.
Jean-Claude Trichet, governor of the Banque de France, said yesterday that investigations into trading must be carried out "to know what really happened, to be wary of rumours."
"We're in a world where everything is possible and we must believe the facts - the proven acts," he said in an interview with Europe 1 radio.
One day before two American Airlines jets were hijacked and crashed, 1,535 contracts changed hands on options that let investors profit if AMR stock falls below $30 per share before Oct. 20. That was more than 60 times the previous daily average, and five times the total of all October $30 put options traded before Sept. 10, according to a Bloomberg analysis of options market data.
Those 1,535 contracts were worth $1.6 million at Monday's closing price compared with $337,700 at the end of trading on Sept. 10, according to Bloomberg data. A contract represents options for 100 shares.
Similarly, October $30 put options for UAL soared, with 2,000 contracts traded on Sept. 6, three trading days before the attack. That was 285 times the previous average trading, and almost 75 times the total number of those options traded up to that time. The 2,000 contracts were valued at $2.4 million Monday, compared with $180,000 on Sept. 6.
Stocks of airlines, insurers and investment banks already had been declining for months because of concerns about slowing economies and falling stock markets around the world.
On Sept. 10, the day before the attacks, AMR was down 25 per cent from the start of the year, UAL was down 22 per cent, and Morgan Stanley shares were down 42 per cent since Feb. 1.
Market records might help show whether alleged terrorist Osama bin Laden or other terrorists were behind high-volume trading, and might help securities regulators trace a money trail to some of those responsible for the attacks at the World Trade Centre.
"It's a matter of great interest to intelligence. To the extent we find this evidence, we shouldn't just focus on it as proof of insider trading but as evidence of a desire to commit murder and terrorism," said Columbia University law professor John Coffee.
Former SEC enforcement chief William McLucas said regulators will "certainly be able to track down every trade, where the trade cleared, where the trade was directed from."
In addition to Germany, European regulators in France, Italy, Spain and the U.K. are examining trading around the dates of the attacks for irregularities, spokesmen said.
Japan's Securities and Exchange Surveillance Commission is probing futures trade in Tokyo and Osaka, SESC officials said. On the Osaka Securities Exchange, 8,826 Nikkei-225 December futures contracts changed hands on Sept. 10, compared with a daily average of 1,151 contracts in the previous week.
Hong Kong's stock exchange and the market regulator are also checking for unusual trading activities. Banking regulators told lenders to check suspicious accounts for any connections with bin Laden.
At Morgan Stanley, trading in October $45 put options jumped to 2,157 contracts traded between Sept. 6 and Sept. 10, almost 27 times a previous daily average of 27 contracts.
Other brokerage and insurance companies where options trading surged include:
- Citigroup Inc., which has estimated that its Travelers insurance unit might pay $500 million in claims from the World Trade Centre attack. It had a jump in trading of October options that profit if shares fall below $40 apiece. Almost 14,000 of those options contracts were traded from Sept. 6 to Sept. 10 - about 45 times the previous daily average.
-Bear Stearns & Cos., where investors traded 3,979 contracts from Sept. 6 to Sept. 10 on September options that profit if shares fall below $50. The previous average volume for those options was 22 contracts a day.
-Marsh & McLennan Cos., the biggest insurance brokerage, which had 1,700 employees working in the World Trade Centre. Traders on Sept. 10 exchanged 1,209 contracts on options that profit if company shares fall below $90 through the third week of September. Previously, 13 contracts had traded on an average day.