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Exchange Probes Possible Manipulation of Stock-Options Exchange

November 16, 1989

CHICAGO (AP) _ The Chicago Board Options Exchange, the world’s largest options marketplace, is investigating reports of program-trading abuses to determine whether rules were violated during hectic trading, officials said Wednesday.

The exchange is looking at trading in Standard & Poor’s 100 stock-index options during the Oct. 13 market plunge as well as on other volatile trading days, said CBOE President Charles Henry.

The CBOE is the fourth major exchange to search for program-trading abuses. The New York Stock Exchange, the Chicago Board of Trade and Chicago Mercantile Exchange are conducting separate probes of computer-assisted program trading in stocks and stock-index futures.

Those three exchanges have tightened surveillance measures and imposed stiff fines after long-term federal scrutiny resulted in numerous indictments and convictions.

Also Wednesday, a federal grand jury indicted two more Chicago Mercantile Exchange traders on charges of wire fraud, mail fraud and violating exchange rules.

The charges bring to 49 the number of people indicted since Aug. 2 in the government probe of corruption at the Chicago Merc and the Chicago Board of Trade, the world’s two largest futures exchanges. A third trader, who already had been charged, was also named in Wednesday’s indictment, which supercedes his previous indictment.

Henry downplayed the CBOE investigation, saying the exchange has routinely monitored days of heavy trading since 1987.

″We have an ongoing study,″ he said in a telephone interview. ″We also make sure participants in our market behave as they are supposed to.″

Program trading is the rapid buying and selling of stocks by computer to take advantage of temporary price differences. A stock index option is the right to buy or sell the underlying value of a stock index, such as the S&P 100, at a specified price within a specified time.

The CBOE is looking at ″sources of volatility,″ including trades - program or otherwise - that may have involved manipulation or other forms of rule-breaking, Henry said.

For years, the exchange has been the subject of rumors about program- trading abuse. The rumors have been prompted partly by the complexity of program-trading strategies related to options.

Program trading involving stock-index options, commonly called OEX, has also been blamed as a contributor to stock market volatility.

Tom Bond, CBOE vice president, pointed to three particular days of heavy trading that are under scrutiny: Oct. 13, when the Dow Jones industrial average fell 190.58 points, its second biggest one-day point loss ever; Oct. 16, when the Dow rallied 88.12 points; and Oct. 24, when the Dow Jones industrials dropped 80 points before rallying to finish the day with a 3.69- point loss.

The CBOE’s scrutiny of trading practices may date back to a class-action lawsuit filed against the exchange after the October 1987 stock market crash.

A group of more than 1,000 investors contend in the lawsuit that the CBOE and floor traders responsible for making markets in certain options on the S&P 100 violated federal law and the exchange’s own rules by charging inflated prices for options contracts.

In May, the Securities and Exchange Commission censured the CBOE for failing to enforce its own rules on trading manipulation involving stocks and options on Standard & Poor’s 500 index.

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