Options regulatory entity asked to look at unusual Leap call trades

Wed Aug 28, 2013 7:35pm EDT

Aug 28 (Reuters) - Options market maker Timber Hill said it has asked the Options Regulatory Surveillance Authority to look into unusual bullish option trades in wireless carrier Leap Wireless International Inc ahead of a takeover deal announced on July 12.

The regulatory authority, in response to the Timber Hill request, is reviewing the trades "to determine if any exchange or SEC rules may have been violated," according to a report in USA Today on Tuesday. Timber Hill is a division of Interactive Brokers Group.

Options volume on Leap surged on July 12 ahead of an announcement after the close of trading that AT&T would acquire Leap. There was noteworthy interest in the call options on the stock. The timing of large bullish option trades on Leap while the U.S. financial markets were still open, raised concerns that the news may have reached investors ahead of time. .

"In the early afternoon on July 12 during the trading session, there was aggressive call buying" in Leap options, said Sean Flynn, an options trader at Timber Hill. "When this type of activity occurs we tend to believe it is not pure luck or speculation."

Last month "we asked the Options Regulatory Surveillance Authority to look into the unusual trading," he said on Wednesday.

AT&T agreed to acquire Leap for $1.19 billion, or $15 per share. The price represented an 88 percent premium to Leap's closing share price of $7.98 on Friday, July 12.

Leap's shares more than doubled to $17 in after-hours trade on that day. The stock closed at $16.95 on the following Monday.

USA Today quoted Interactive Brokers Group Chief Executive Officer Thomas Peterffy as saying its market makers had sold Leap calls and that the firm had incurred an immediate loss of $1.5 million when the news was announced. Peterffy did not immediately respond to an email from Reuters.

"Looking into the data, we saw early on July 12 sporadic call buying on Leap that accelerated in the last 18 minutes before the close of trading," said Eric Hunsader, Chief Executive of Nanex, a data feed provider in Chicago.

"Most of the buying occurred in the $7, $8, $9 and $10 strike calls with the bulk in the contracts that expire in July," Hunsader said.

Owners of call options, contracts that convey the right to purchase the company's shares at a fixed price by a certain date, benefit because as the stock rises, the value of the call option goes up.

The U.S. Securities and Exchange Commission on Wednesday declined to comment on the Leap options activity.

In 2006 the U.S. options exchanges set up the Options Regulatory Surveillance Authority, ORSA, an entity to collaborate on insider trading surveillance and investigations.

A spokeswoman for the Chicago Board Options Exchange, which coordinates efforts for ORSA, said: "CBOE takes its regulatory responsibility very seriously and does investigate unusual trading activity, however, we do not comment on individual investigations."

The activity in Leap options is another instance of unusual trading in the options market preceding market-moving news.

Two studies done for Reuters found there were numerous examples of unusually heavy options trading prior to market-moving news.

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