Did Bin Laden speculate on the US airline stock derivatives (shorting them) between September 6, 2001 (date when he learned the timing of the attacks), and September 11, 2001 (date of the 4 attacks)?
Chris F. Masse May 23rd, 2008
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Via Mat Fogarty of Xpree
Unusual Option Market Activity and the Terrorist Attacks of September 11, 2001 - by Allen M. Poteshman - 2006
Options traders, corporate managers, security analysts, exchange officials, regulators, prosecutors, policy makers, and—at times—the public at large have an interest in knowing whether unusual option trading has occurred around certain events. A prime example of such an event is the September 11 terrorist attacks, and there was indeed a great deal of speculation about whether option market activity indicated that the terrorists or their associates had traded in the days leading up to September 11 on advance knowledge of the impending attacks. This speculation, however, took place in the absence of an understanding of the relevant characteristics of option market trading. This paper begins by developing systematic information about the distribution of option market activity. It constructs benchmark distributions for option market volume statistics that measure in different ways the extent to which non–market maker volume establishes option market positions that will be profitable if the underlying stock price rises or falls in value. The distributions of these statistics are calculated both unconditionally and when conditioning on the overall level of option activity on the underlying stock, the return and trading volume on the underlying stock, and the return on the overall market. These distributions are then used to judge whether the option market trading in AMR, UAL, the Standard and Poor’s airline index, and the S&P 500 market index in the days leading up to September 11 was, in fact, unusual.
The option market volume ratios considered do not provide evidence of unusual option market trading in the days leading up to September 11. The volume ratios, however, are constructed out of long and short put volume and long and short call volume; simply buying puts would have been the most straightforward way for someone to have traded in the option market on foreknowledge of the attacks. A measure of abnormal long put volume was also examined and seen to be at abnormally high levels in the days leading up to the attacks. Consequently, the paper concludes that there is evidence of unusual option market activity in the days leading up to September 11 that is consistent with investors trading on advance knowledge of the attacks.
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My thoughts:
- Hummmm…. I’m skeptical.
- The FBI, the SEC and the 9/11 Commission looked into each of these options trades, and they were all legit.
- This issue has consequence for the field of prediction markets. At the heart of the DARPA-PAM brouhaha was the fear that Bin Laden and his friends could speculate on the PAM prediction exchange, so as to profit financially from his terrorist activities. Bullshit argument.
- You remember that the CFTC asked in its “concept release” whether they should forbid prediction markets about terrorism —and on what ground.
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Very interesting! (P.S. The main link is broken.)
@Robin Hanson: Corrected. Thanks.
http://http//www.journals.uchi.....086/503645
Haven’t read the paper yet, but yes this was fully investigated and nothing was found. As the linked story indicates, there were a few tangible reasons to sell airline stocks in the weeks leading up to September 11th. I actually sold Boeing on September 10th.
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Also the the CFTC does not have jurisdiction over those infamous sorts of event markets because they do not qualify as statutory commodities. Relevant part of CEA, the definition of “excluded” (meaning statutory) commodity:
QUOTE
(iv) an occurrence, extent of an occurrence, or contingency (other than a change in the price, rate, value, or level of a commodity not described in clause (i)) that is—
(I) beyond the control of the parties to the relevant contract, agreement, or transaction; and
(II) associated with a financial, commercial, or economic consequence.
QUOTE
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Therefore, by their nature, there is no way to identify who might manipulate the outcome of these kinds of markets, so they do not qualify as commodities. It’s a nice, antiseptic way for them to avoid that question entirely. A broad-based index is another story.