Thursday, December 20, 2012

NYSE Euronext (NYX) -- Unusual Trading in NYX Takeover and Potential Hidden Trades

NYX is trading $32.01, up 33.10% with IV30™ down 13.3%.The LIVEVOL® Pro Summary is below.

NYSE Euronext is a global operator of financial markets and provider of trading solutions.

I found NYX because of the price gain which ultimately is due to a much rumored takeover.  The news is that NYX will be purchased by Intercontinental Exchange for a stock and cash deal worth $8.2 billion

This deal has been on-again-off-again for more than a year with questions surrounding regulatory approval and the such.  I mention the length of time these rumors have swirled because there may be suspect activity that had taken place.

Let’s start with the Options Tab, below.

I have highlighted the Jan 24 calls – note the OI of 10,343 contracts. I have included the Options Tab from 12-6-2012 below to begin the discussion.

Note that the OI on 12-6-2012 was just 1,214, but 2,525 calls traded on that day. To make a long story short, I have included a chart of the Jan 24 calls OI with dates highlighted to focus the analysis.

What we can see is that starting on 12-6-2012 and moving to 12-17-2012, the OI started gapping up. It moved from what was a steady 1,124 to now over 10,000 in less than two weeks. And, what do you know, three days after the last bulk of ATM option purchases, the company announces its merger.

I see approximately ~9,000 calls purchased in that short window costing ~$0.60 (on average) that are now trading at ~$8.00, for a ~1,200% gain in fourteen calendar days. That’s about a $6.5 million gain. How fortunate…

Not convinced this is insider trading… That’s OK, there’s more… A lot more…

The largest OI in any call line in any month on any strike all the way out to the Jan 2015 options in NYX is in those Jan 2013 24 strike calls. Hmmm…

Even more interesting is how the position was accumulated. Rather than lifting offers, an astute trader bid up the calls and let those bids get hit. The purpose of this is two-fold:

1. Purchasing the calls for a slightly lower price
2. The trades look like sales since they trade on the bid

Want some evidence of this astute trading? Sure – here are the largest trades on 12-6-2012 in those calls.

Note the price was $0.40 for all of those trades and the NBBO reflected $0.40 x $0.41. So a sale right? Not quite. Below I have included a level II view of those options as they traded.

What we can see is that the NBBO was $0.37 x $0.41, but then a $0.40 bid for 1,224 contracts came in. That bid was hit, and got the initiator long while making the trades look like sales.

In my humble opinion, this is a dangerously suspicious case where insider information may have been used to create a windfall of wealth in two-weeks time.  More than that, there is “circumstantial evidence” of a trader trying to hide the trades.  That’s how a pro would do it – that’s how a pro sees it… and that’s what I fear has happened. Of course, suspicious trading is NOT evidence of malfeasance – sometimes suspicious trading is just good luck.

This is trade analysis, not a recommendation.

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