Options Exchange Joins Trading Probe


The Chicago Board Options Exchange, the world’s biggest options market, has joined a widening probe of whether terrorists may have profited from bearish trades in airline, insurance and brokerage stocks before the attacks on the World Trade Center and the Pentagon.

Officials with the exchange said Tuesday that they are investigating an unusually high volume of sales of “put” options on stocks such as UAL Corp. and AMR Corp., parent companies of United Airlines and American Airlines, in the days before their jets were used to destroy the World Trade Center and severely damage the Pentagon.

Buyers of put options are guaranteed the right to sell stocks at a targeted price, and they make a profit if the shares’ value goes down.

“CBOE is conducting an investigation of trading prior to the news event,” said Lynne Howard-Reed, a spokeswoman for the exchange. She declined to give further details.


The U.S. Securities and Exchange Commission and securities regulators in Europe and Japan also are looking into whether shares in particularly vulnerable industries could have been subject to a ghoulish form of insider trading by people with advance knowledge of the attacks.

SEC Chairman Harvey Pitt said the agency’s enforcement division “has been looking into a variety of market actions that could be linked to these terrible acts.”

In a letter Tuesday, New York Rep. John J. LaFalce, ranking Democrat on the House Committee on Financial Services, urged Pitt to ask Congress “for any additional powers or resources you may require” to get to the bottom of the matter.

“To the extent that individuals or entities may 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,” the letter said.


But some analysts said they have seen little evidence so far of market manipulation. Given the general weakness of the stock market, it is “not surprising to see that there were people buying puts, basically making bearish bets on these stocks,” said Joseph Sunderman, manager of research at Schaeffer’s Investment Research in Cincinnati.

Reports of suspicious trading activity began circulating over the weekend in Europe, involving three big reinsurance firms--Munich Reinsurance, Swiss Reinsurance and AXA. Reinsurers sell backup insurance to protect major insurers from big losses.

In the days leading up to the Sept. 11 attacks, the companies’ shares were hit hard by “short” selling by investors who were counting on the prices to drop. In short selling, an investor borrows and sells shares, but has a deadline by which to replace them. If the price falls, the seller profits from the difference between the price he got for the shares and what he had to pay for replacement shares.

In a report Tuesday, Bloomberg News said three trading days before the attack, the volume of put option contracts sold for UAL was 285 times higher than average. According to Bloomberg, the day before the two American Airlines jets were hijacked and crashed, the number of option contracts for AMR was 60 times the daily average.


Options volume for some brokerage and insurance firms was also high. Trading in put options for Morgan Stanley Dean Witter & Co., which occupied 22 floors of one of the trade center towers, was 25 times the usual volume, Bloomberg said.

Some analysts said the market moves probably resulted from the economic slump and the fact that market weakness has been accelerating in September. The airline industry was already in the dumps, and brokerage stocks always fall when the market is down, they said.

Others described the short selling of reinsurance stocks as more curious. “The insurance sector . . . was one of the brightest spots in a very difficult market,” said Pete Gallo, New York bureau chief of, which tracks hedge funds and other alternative investments.

If, indeed, terrorist groups were involved in market manipulation, it would mean they are trying to finance a campaign of terror against Western capitalism “by using its very core institutions--the markets,” said John C. Coffee, a Columbia University law professor.


If terrorists were involved, “I can only speculate on how many entities there could be between the mastermind and the purchase,” said James L. Sanders, former regional administrator of the SEC in Los Angeles.

Experts said it would be hard to permanently conceal the identities of those who took part in the trades.

Said a market regulator who would not speak for attribution: “It’s very hard to pull something like this off and not leave a paper trail someplace.”



Bloomberg News contributed to this story.