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Options
Interactive Brokers Cries Foul
Liz Moyer, 07.06.07, 4:00 PM ET
For the second time since its public stock debut in May, derivatives trading giant Interactive Brokers Group says options market manipulation is weighing on its business.
The firm was hit with a $37 million loss in May because of manipulative trading activities on the German electronic stock market, it said in a regulatory filing late Thursday. News of the loss and its potential effect on second-quarter revenues sent shares of Interactive (nasdaq: IBKR - news - people ) down nearly 8% in heavy trading Friday.
Interactive Brokers says several other market makers were also affected by the trading, which is being investigated by German financial regulators, and that their losses are also believed to be "substantial."
The activity happened in shares of German company Altana (nyse: AAA - news - people ), which had declared a special dividend early in May to coincide with the sale of its pharmaceuticals division. On the ex-dividend date, 31 million shares, or about 44% of Altana's outstanding shares, crossed the electronic Xetra market. The price dropped 25%, pushing the price of the related options "into the money." Interactive Brokers, as a market maker for Altana, ended up on the wrong side of those trades, to the tune of $37 million.
Altana's shares recovered the next day, shooting up 64% after those who sold the previous day to avoid the taxes on the dividend payment bought up shares.
Interactive Brokers claims traders "unlawfully colluded" to manipulate the stock.
It's not the first time Interactive has claimed market manipulation is costing it money. In May, after its highly anticipated initial public offering, the firm announced a $25 million loss as a result of being on the wrong end of trades. The trading activity suggested some were taking advantage of non-public information in advance of major corporate announcements.
Several other options market making firms, including closely held Peak6 in Chicago and Goldman Sachs (nyse: GS - news - people ) in New York, have complained that possible manipulation is cutting into revenues. There are a limited group of such firms, but they control about 44% of trading, according to Options Clearing Corp. As the name implies, options market makers arrange orderly trading in options between buyers and sellers. When a client goes to sell and there is a lack of buyers, the market maker puts his own firm's capital at risk to make the trade. When a customer wants to buy and there are no sellers, the market maker pulls from his own firm's inventory.
In recent months, there have been some days when demand for certain call options--a bet that the underlying stock is about to rise in price--overwhelmed supply, and Interactive Brokers had to meet the demand. That meant it was on the hook to lose if the stock shot up, which happened a few times during the first quarter, hence the $25 million shortfall.
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