Posted on 10/21/2001 9:58:15 AM PDT by rdavis84
This is a follow-up to the unusual activity on "Put Options" questions put into an earlier post --- http://www.freerepublic.com/focus/fr/552742/posts . A friend who I consider knowledgeable in this type matter e-mailed me his assessment and reasoning on the post. It's included here as the second part of this posting. The original content follows --------
I've got some questions for knowledgeable financial folks on FR. They pertain to "Put Options" that are reported in a UK source that is very specific. Here are my questions ---
1. What conditions in the investment area at the times specified could have caused such a large activity in "Puts"?
2. What conditions would be Specific and Unique to United and American Airlines to cause "Puts" to be a preferred choice?
Here's the Specific information, if any of it is incorrect please note the correct info with some linkage -----
"Further details of the futures trades that netted such huge gains in the wake of the hijackings have been disclosed. To the embarrassment of investigators, it has also emerged that the firm used to buy many of the "put" options – where a trader, in effect, bets on a share price fall – on United Airlines stock was headed until 1998 by "Buzzy" Krongard, now executive director of the CIA.
Until 1997, Mr Krongard was chairman of Alex Brown Inc, America's oldest investment banking firm. Alex Brown was acquired by Bankers Trust, which in turn was bought by Deutsche Bank. His last post before resigning to take his senior role in the CIA was to head Bankers Trust – Alex Brown's private client business, dealing with the accounts and investments of wealthy customers around the world.
There is no suggestion that Mr Krongard had advance knowledge of the attacks.
Between 6 and 7 September, the Chicago Board Options Exchange saw purchases of 4,744 "put" option contracts in UAL versus 396 call options – where a speculator bets on a price rising. Holders of the put options would have netted a profit of $5m (£3.3m) once the carrier's share price dived after 11 September. On 10 September, more trading in Chicago saw the purchase of 4,516 put options in American Airlines, the other airline involved in the hijackings. This compares with a mere 748 call options in American purchased that day. Investigators cannot help but notice that no other airlines saw such trading in their put options.
It was not just airlines that were targeted by remarkably canny investors. One of the biggest occupants of the World Trade Centre was Morgan Stanley, the investment bank. In the first week of September, an average of 27 put option contracts was bought each day in its shares. The total for the three days before the attacks was 2,157. Merrill Lynch, anotherWTC tenant, saw 12,215 put options bought in the four days before the attacks, when the previous days had seen averages of 252 contracts a day.
Attribution ---- UK Independent
Reply
Intially. I'm surprised (well not really) that this hasn't been the lead story on the networks for quite a while. People always talk about "follow the money".
There is no easier place to "follow the money" than in the US markets.
The futures markets is one of the most highly regulated. (especially since the days of refco, red bone, and the hildabeast).
It is really impossible for $1 dollar to go "unclaimed" with an "unknown" recipient. much less $5mm.
In the 1st place, the volume would "red flag" the traders and the compliance officers of any investment banking firm that brokered these option transactions.
From what I remember, Alex Brown is mainly an "equity" trading firm dealing in stocks. The puts & calls referred to are considered "over the counter options" on various stocks.
The applicable regulatory institutions for these trades would be:
1. NASD - National Association of Security dealers. a "self regulatory" body that monitors trades, traders, brokers, broker dealers, and customers dealing in equities, municipal bonds, corporate bonds, US govt. agency bonds, US gov't bonds, and option contracts on all of the above.
The "self regulatory" nature of this body works well for the most part, but may make it vulnerable for mischief as it does not have the full regulatory powers of a govt. agency.
2. SEC - Securities and Exchange Commission. this body is responsible for receiving and approving stock and bond issues. the SEC should ultimately be the body responsible for investigating these trades.
Fertile grounds for research will be found in NASD & SEC regulations both readily available on the net.
1st thing that I've got to call BS on it the "know your customer rule". the "spin" on these transactions never mention this basic SEC reg.
IOW, Alex Brown as a broker dealer and the registered rep that "took the order" is required to "know their customer". this would include written financial statements, federal tax ID's, and delivery instructions (bank wire instructions/account numbers, and actually customer accounts set up w/ the broker dealer firm) are necessary to "settle" trades.
A registered rep of a firm must have an order from an "active" customer in order to engage in a trade as most of these trades are considered "riskless transactions" for the firm. IOW, rep gets order to buy or sell from a known customer. Trade desk at firm executes the trade for customer's benefit. firm charges customer a fee or makes a "spread" between the bid and offer on a security.
Therefore, the firm is not liable for settlement (payment), yet they make a fee or commission for handling the trade.
Absent this information on the "customer" one has to assume that the trade was "a position" taken by the firm itself. this would be considered to be a trade for the "house account" rather than for the customer's account and the firm itself would be liable for any losses or they would benefit from any gain.
Mystery transactions just can not occur in any reasonable legal regulatory approved manner.
A firm that is a market maker or holds a position in a particular security may execute option transactions to protect or hedge their investments.
eg. in this case: say Alex Brown owned 1,000 shares of United & they saw fuel prices increasing placing pressure on profit margins. the firm may choose to sell puts on that stock in anticipation that the stock prices would go down. the sale of the puts would in effect enable the firm to buy back the stock at a lower price...or see the value of their puts increase as the stock price went down. therefore reducing their basis in the stock to market levels that reflect the actual value of the stock based on anticipated lower profits.
Fraudulent trades can and do occur when unscrupulous registered reps of a firm will "hang out" a trade by placing an order during a fast paced market move with out having the expressed order from a known customer.
Many times reps have "discretion" from customers to execute a trade when something is happening in the market and the rep is unable to contact the customer to obtain their approval. discretionary trades are required to have prior written approval of the customer.
Many times in an obvious rally or sell off brokers will place an order without contacting the customers. if things work out right, the broker closes out the position by liquidating the position, and sending the customer a "pair off" check for the profits. n this case the settlement date for the buy & the sell are the same, so the customer just gets the "net proceeds".
Brokers get caught up in the wrong side of a trade when markets move the wrong way, and on settlement day the customer is liable for paying the broker the net difference of the "pair off".
During the bond rally of the mid 80's it was not uncommon to buy bonds in the market in the morning.. go to lunch...and come back and "pair off" the trade selling at a profit of several thousand of dollars.
Most of the profits would go to the firm as gross profits and the "pair off customer" would get a smaller part of the profits with out having to put any money up.
Bottom line re: the Alex Brown options. there has to be a paper trail of:
1. broker
2. customer
3. customer's particulars incl. name, address, tax id, settlement instructions.
If there is not:
1. fraudulent trade
2. trade for house account
3. somebody is trying to BS somebody into believing that they don't know who placed the order....this is absolute bull sxxx.
This is my 1st impression of the piece you linked me to and does not deal with the previous back ground of the registered rep/ broker/ or director named in the article as being a former spook.
Further re: the "know your customer rule"
Company disclosure records of all customers should include a financial statement documenting the "capacity" of each customer to enter into a transaction of a certain size.
IOW, if my net worth and income are, say 100,000 net and 50,000 per year, I should now be allowed by that firm to execute a trade for say $5million in securities.
My liquid assets should also show the capacity to settle the trade. which in the case of OTC stock options is probably 3 days. if the assets are not there, the broker dealer firm is prohibited from executing that trade.
The firms trade desk and compliance offers would be violating NASD & SEC regs if they did so.
another possible major NASD/SEC violation in this case could be "insider trading"..
Back to the 911 transactions, the enormous volume of option contracts prior to the event would make "insider knowledge of the upcoming event" a near certainty.
Tracking down the actual principals in the trades is relatively easy as NASD - SEC regulations require member firms (Alex Brown) to maintain records of the trades for at least 5 years.
In the industry, the trade ticket for an order is known as a "confirmation". this document supplies a description of the security, quantity, purchased, date of trade, settlement date, price of purchase, name of broker, and these trades are generally time stamped as of the time the trade is executed.
Savvy investors may enter into option trades against an inventory position they have to either enhance yields or hedge against certain losses in value.
OTC options written on specific stocks are generally thinly traded and illiquid.
A sophisticated investor would more likely "hedge" his entire portfolio (or even a portion of his portfolio) by using the more efficient exchange traded option contracts of the S & P index as opposed to OTC options on specific stocks.
In the case of the OTC contracts on the airlines, brokers, and insurance companies involved in the 911 disaster, the abnormal volume of OTC options should "red flag" traders, market makers, and most importantly compliance officers to the potential of "insider trading" in a particular stock.
That sure would be interesting. But I doubt the WHOLE group would be at the WTC. Just enough to shake up the rest of them.
Same thing as OKC and BATF? Dang, hate when that happens!
Would the records that GATA had subpoenaed in Gold manipulation/depression have been lost too?
The management out-ranking the C.O., has entire discretion at most "houses," to over-rule C.O.'s, and most management do just that routinely.
The response of your friend is correct up to the point where what he says is supposed to happen.
I'll focus there.
In fact, the responsibilities of the C.O. is constantly subject to abuse by brokers and the management.
The C.O. is like the town sheriff; and quite often alone with tremendous responsibility which is easily swept aside by the management, because the management is always under pressure "from on high," to "meet the numbers."
The office of C.O. is very often under-staffed, and the office is always having to re-edit the paperwork which brokers and managers wish would "simply go away."
Meaning ...
What is supposed to happen, does not, on a regular basis. And, only as a catch up, are things set right (if possible).
That is to say, "the paper trail" can and sometimes is, lost.
That said, however, knowledge of who is behind the tradings of the "puts," is very difficult to hide --- because that knowledge will be on the minds of the management who would have their C.O.'s 'turn the other cheek' to "certain sloppiness."
The management are always sticking themselves with a balancing act between the numbers and the requirement for transaction accuracy to the letter of the law. Does the manager need to meet numbers this month or meet the trade's auditors?
Every day, this "rolls down hill" upon the C.O.'s.
Question:
Does the managment of a "house" which initiates such trades in question ( such as the 9-11 "puts"), know such initiators?
Answer:
Yes.
And that answers the puzzle for September 11, 2001 --- "mysterious parties" did not make the trades.
Known parties did.
There is NO mystery about it, though we may not yet be privy to exactly who were the hatchets.
"And that answers the puzzle for September 11, 2001 --- "mysterious parties" did not make the trades.
Known parties did."
I think a pivot point, or big question right now would be "Will we ever know?" I believe that most large trades/transactions may be considered "public information", correct me if I'm wrong. So to eliminate suspicion about this matter, it would be helpful if the players were made public, eh? :-)
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