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# 9/11 Terror Trading 15 years later - Marc Chesney interviewed by Lars Schall https://youtu.be/PrI8g3yHxAM
> 0:16 [Lars Schall] Fifteen (15) years ago shortly after 9/11, the news media reported that cases of insider trading occurred connected to the terror attacks of September 11. A financial pundit commented at the time, in U.S television, this could very well be insider trading at the worst, most horrific, most evil use you've ever seen in your entire life. However, the mainstream media dropped the issue a few weeks later completely and forever. Moreover, in 2004, the 911 Commission Report [https://en.wikipedia.org/wiki/The_9/11_Commission_Report] officially stated that no such thing as insider trading connected to 9/11 took place. The suspicious looking trading activity pre-9/11 proved consistently innoxious. However, there are a few academic economists who differ with the 9/11 Commission at this point. One of them works here at the University of Zurich, and I will visit him now in his office.
> 1:22 [Lars Schall] First of all, Professor Chesney, thank you for having us.
> 1:25 [Marc Chesney] You're welcome.
> 1:26 [Lars Schall] You have written with two colleagues of yours, it was a scientific paper on the topic of 9/11 insider trading. This is a topic that did not generate a lot of scientific, umm, research. Why did you decide to cover this topic?
> 1:44 [Marc Chesney] You know, in my capacity as a professor, in particular as a finance professor, my duty is to analyze functional imbalances, crises, but also frauds and functional crimes, and that's what we tried to do during, something like ten (10) years.
> 2:05 [Lars Schall] Now, uhh, related to the topic of 9/11 insider trading, we have to talk about **put options** and **call options.** What are put options?
> 2:16 [Marc Chesney] A **put option** entitles its owner the right to sell a given stock at a given date or during a given period of time at a given price; the so-called strike price.
> 2:29 [Lars Schall] Yeah. So you can buy something and when the underlying price drops, and you have, ummm, calculated this correctly, you can cash in some money.
> 2:40 [Marc Chesney] Yes. If these are a drop of the stock prices, and you cash, you can cash in a profit. Yes. It's true.
> 2:46 [Lars Schall] Your research article has the title **Detecting, um, Abnormal Trading Activities in the Option Markets** [https://marcchesney.com/site/assets/files/1/detecting_abnormal_trading_activities_m__chesney-_r__crameri-_l__mancini_-_j__of_empirical_finance_-_komplet.pdf]. Can you elaborate on this paper please?
> 2:56 [Marc Chesney] Yes. We have, uh, defined, first of all, **three criteria**, in order to identify a possible insider trading activity. First criteria, the **volume**, or the so-called **open interest**. That is, to say or precisely, a very strong increase in the **open interest**. Allow me, first maybe, to... to define what the **open interest** is. It corresponds to the number of outstanding options in the market; so a very strong increase, from almost zero to maybe, uhh, 500... 1000 option contracts. One contract, by the way, corresponds to one hundred (100) options, just, just to be clear. Second criterium, the return of the profit, a very strong return, and when I say very strong it's not five (5) or ten (10) percent or twenty (20) maybe, three (3), four (4), five (5) hundred (100) percent (300%, 400%, 500%) in a few days or in a few weeks, and finally the last criterium, the most, uhh, technical one, the opti... the position is not hedged. If you're an insider, you don't need to hedge, because you know, or you think you know, what will happen tomorrow. So we tried to check that the position... position was not hedged. Just to be clear, it's not a proof... it's not proof per se of Insider trading activities. It's a statistical study. Okay, just... just to be clear, in order to, uh, to to be sure that it is a proof, we will have to have access to names. We use the d... financial data... databases without, uh, names, only **prices** and **volume**. So it's not proof per se, but still it's interesting as you [are] gonna see in a minute.
> 4:42 [Lars Schall] Yeah, but you did not have the actual trading data from the **Brokers**.
> 4:47 [Marc Chesney] Now we purchased, uhh, financial databases CBU [? French (thick inflection) for CBOE? provided by OptionMetrics? ?] and other databases in, ehh, in Europe. We, uhh, we analyzed around nine millions of, uhh, financial transactions, quite a lot, from the U.S., from Europe, but again **without names**, only **prices**, **volumes**, etcetera, etcetera.
> 5:08 [Lars Schall] Mhmm, and how many of those trades, that you took a look at, were actually **informed trading** [http://refhub.elsevier.com/S0927-5398(15)00026-2/rf0025] activities?
> 5:16 [Marc Chesney] Less than 0.01% were suspicious, just to be clear. So, one out of ten thousand, less than one out of ten thousand transactions were suspicious. I said suspicious, because again, it's not a... it's not proof per se. Uhhh, so we were very conservated, it's a... conservative. It's a very small number.
> 5:36 [Lars Schall] Mhmm. So, ehm, you took a look at different stocks from different sectors and one of them is the airline sector.
> 5:46 [Marc Chesney] Yes. Airline sector, banking sector and other insurances, but just to be clear, the the study does not focus on the on September 11th. The f... study focuses on insider trading. We defined our criteria. We applied our econometral... econometrical, uh, methodology, and then we identified specific cases.
> 6:10 [Lars Schall] One was the airline sector.
> 6:12 [Marc Chesney] Yes. True.
> 6:13 [Lars Schall] and there you found some suspicious trading.
> 6:15 [Marc Chesney] Exactly, mainly with three, with three companies: Unitene... United Airlines, American Airlines, and Boeing. Let me give you an example.
> 6:23 [Lars Schall] Yeah. Please.
> 6:28 [Marc Chesney] American Airlines. The option, the **put option**, with a strike thirty dollars ($30) maturity end of October. This **put option** gave the right to its owner to sell the stock at a price of thirty dollars ($30) at the end of October. Here were the smaller graph. On the right-hand side we have the return of the position. On the left-hand side, [we have] the **open interest**. So as mentioned previously, one contract corresponds to one hundred (100) **put options**. The black bars correspond to the **volume**. Before the month of September, the **volume** on the specific option was almost zero (0), no trades. Then you see first trade, first trade, uhhh, and then a big trade on September 10th, one day before the terrorist attacks. Here you see something like 1,500 contracts, meaning 1,500 times one hundred (100) **put options**; so a strong increase of the inter... of the **open interest**, which corresponds to the first criterium of this analysis. Then, markets were... financial markets were closed from September 11th until September 17th. Markets reopened, and you see a huge black bar, meaning a huge **volume** and the open tri... and the **open interest** decreased on the 17th, of s... around 500 contracts, and again a few days after, at the end of the month of around 500 contracts. So 500 plus 500, around 1,000 **put option** contracts were exercised a few days after the terrorist attacks.
> 8:36 [Lars Schall] Yeah, and are these then the profits here that we see?
> 8:40 [Marc Chesney] The profit, so let me give you an example. The value of the option of the specific **put option** on September 10th was 2. ... $2.15. Why? Because the value of this... the... of this, uh, stock, the spot price of the... of this stock was on September 10th $29.7. When markets were opened on September 17th, a big drop in the stock price was witnessed; so from $29.7 to $18; and when the stock price decreases, the put price increases; and the put price went from $2.15 on, uh, September 10th to $12 on September 17th. Imagine the return; around 450%. Y... that's what I say 'huge return' in corresponds to the second criteria. Third criteria, this trade was not hedged by the way; so a strong, uhhh, return. Now let me compute for you, ehh, the profit. So, something like well oelth... one thousand contracts were exercised in a few days. Thousand (1,000) contracts times one hundred (100) **put options** per contract times something like ten dollars ($10) profit per option, corresponds to around one million dollars ($1,000,000) profit for this pef... specific option. Why ten dollars ($10) profit? Again, the investment was very interesting, b... by, imagine you buy a **put option** at a price of two fifteen dollars ($2.15) and a few days after, you sell it for twelve [dollars] ($12), meaning that the profit was indeed around ten dollars ($10), with a huge return.
> 10:41 [Lars Schall] Yeah. Okay. This is what you have found out for the airline sector, but you also took a look at two different, uh, two other sectors of the economy; one is the banking sector.
> 10:54 [Marc Chesney] Yes.
> 10:55 [Lars Schall] Tell us about this.
> 10:56 [Marc Chesney] So along the same lines, we identified a few, uhhm, dubious, suspicious trades, with, uh, with various banks, more precisely Bank of America, GPMorgan [JPMorgan], May Lynch [Merrill Lynch], and Citigroup. For the first three banks, they were located either in the two towers [https://en.wikipedia.org/wiki/Twin_Towers] or nearby.
> 11:22 [Lars Schall] Mhmm.
> 11:24 [Marc Chesney] Why Citigroup? It's an open question, but the... the travel insurance unit of Citigroup was confronted, uh, with the primo [primary?] terrorist attacks. Huge losses were generated,
> 11:37 [Lars Schall] Mhmm.
> 11:39 [Marc Chesney] and the the total profit by exercising these, uhh, **put options** corresponds to about eleven million dollars ($11,000,000).
> 11:50 [Lars Schall] Yeah, and there were reinsurers that, uh, were attacked via **put options**?
> 11:57 [Marc Chesney] Also, so, we identified two (2) suspicious transactions: one for Zurich Re [Swiss Re?], and one for Munich Re.
> 12:06 [Lars Schall] Yeah.
> 12:07 [Marc Chesney] Also, occurring a... along the same lines that the example, uh, previously shown, euhhhh, a strong increase in the **open interest**, a very high return, and the, uhhh, in in most cases, uhh, thee, uh, the the trade was not hedged.
> 12:25 [Lars Schall] and the trading activities that you took a look at, those trades were exercised?
> 12:34 [Marc Chesney] In most of the cases, the **put options** were exercised. True.
> 12:40 [Lars Schall] So, the money went into the pockets of those who purchased those **put options**.
> 12:45 [Marc Chesney] In other words.
> 12:47 [Lars Schall] and these **put option** trades are sometimes criminal?
> 12:54 [Marc Chesney] This is a question. I think we should reopen the case, because I said previously, it is a statistical study, we spotted dubious, uhh, cases, but now we need a political decision to reopen the case, to find the names, and to tell whether or not these cases are indeed suspicious, or if it's not the case.
> 13:18 [Lars Schall] So you're calling for a new investigation?
> 13:20 [Marc Chesney] Yeah. Yes. I call for a new investigation.
> 13:22 [Lars Schall] and the investigation of the 9/11 Commission was not sufficient?
> 13:26 [Marc Chesney] I th... in this, uhhh, on this dimon... dimension, not [sufficient]. Take, uhh, the report, the official report of the commission, about five hundred [500] pages; on the specific issue of insider trading, with options, you find a few sentences and a footnote. It should require something like one of the pages, and everything will be put on the table, and everything will be clear.
> 13:53 [Lars Schall] Yeah. As I have mentioned, ummm, this topic of 9/11 insider trading does not get addressed 'big time' [https://onelook.com/?w=big+time] in Academia. Ummm, I have asked an econometrician by the name of Paul Zarembka [https://arts-sciences.buffalo.edu/economics/faculty/ResearchFacultyEmeriti.host.html/content/shared/arts-sciences/economics/profiles/researchprofessor-emeriti/zarembka-paul.html]; he works at the State University of New York; why this is the case and this is what he has told me.
> 14:15 [Paul Zarembka] Oh, I think the real reason why they don't, uh, get... uh, get addressed now, I'll just be frank about my profession. They're scared. I mean, ordinarily, I mean, I know my... I know a kin... I know my profession. I mean, ordinarily, uh, if you have a topic which is as hot a... if it it, well, not... maybe, not as hot as this, but a topic that's not quite so hot, but has huge social implications. You want a researcher because you can get... you you can get your career mov... really moving forward. I'm just talking normal academic terms. You can get your career really moving to investigate such a topic. So, you would think that... that... that there'd be other econometricians out there who wouldn't want to study each one of these studies, and do their own study or criticize these studies or whatever, and, but, do it in a very serious way, and they're both there they they hope that they'll move their professional work forward, and it's not happening, and I think the reason for that is what I said. They are afraid. This is too big for them to want to deal with. They're afraid to their... that their answers, uhhh, that even getting into the topic gives it credence. Let me say it again. Even getting into the topic legitimaci... legitimatizes the topic.
> 15:33 [Lars Schall] Is this true according to your experience?
> 15:36 [Marc Chesney] Are we with him? You know, to put official statements into question is not always easy. You know, it might, uh, put in danger an academic career. So, it's a it's a trick issue.
> 15:52 [Lars Schall] Mhmm, and why do you think that the financial media is not interested in this topic? I mean, I am here, but I don't see, for example, people from Bloomberg, or whoever, talking with you about this topic.
> 16:05 [Marc Chesney] I think basically for the same reasons that you mentioned for the... for the academic world.
> 16:10 [Lars Schall] Mhmm. They are afraid too.
> 16:12 [Marc Chesney] Yeah. I think because it could put in danger, this time not an academic career, but a journalist career.
> 16:17 [Lars Schall] Mhmm.
> 16:18 [Marc Chesney] So, I think, basically, for the same reasons.
> 16:20 [Lars Schall] Yeah. Can you tell us, please, what is the significance of this topic fifteen (15) years after 9/11 took place? Why are you still interested?
> 16:31 [Marc Chesney] Because we should, again I think it's a responsibility of Finance professors to... to shed light, to identify frauds and, uh, and financial crimes. It was not done ten (10) years ago. It's not done today. So that's why we have to dig deeper here.
> 16:48 [Lars Schall] There was one journalist who said that this could be, very well, be insider trading at the worst, most horrific, most evil use that you have, uhh, ever seen in your whole entire life. This was Dylan Ratigan [https://en.wikipedia.org/wiki/Dylan_Ratigan] who said this back then for Bloomberg in September 2001. Now, does this look as the most horrific, most evil use of insider trading, and should people pay attention to it?
> 17:19 [Marc Chesney] It might be the case. Again, what we did is not proof per se of insider trading activities, but we deal with, uhhh, suspicious cases, and that's why we need, uhh, to reopen the case.
> 17:31 [Lars Schall] Yeah, but you were to have to really nail it down to the names, and then you would have... you would need to have the actual trading data, and for example...
> 17:40 [Marc Chesney] and the names, yes.
> 17:41 [Lars Schall] ...we know that the SEC [https://en.wikipedia.org/wiki/United_States_Securities_and_Exchange_Commission] did, uhhh, look at these trading activities
> 17:45 [Marc Chesney] They should give the information.
> 17:46 [Lars Schall] Yeah, but they destroyed it, and this is officially on the record, and now the question becomes 'is this a scandal that they have destroyed evidence connected to a criminal case?'
> 17:58 [Marc Chesney] Yes. It's indeed a big problem because as long as the media and the public will not have access to the information, many people will put into question official statements.
> 18:13 [Lars Schall] Okay. Professor Chesney, thank you for this interview.
> 18:16 [Marc Chesney] You're welcome!
> 18:21 [Lars Schall] and so there you got it. According to scientific research, it is likely that insider trading connected to the terror attacks of September 11, 2001 took place, or as Dylan Ratigan said back then 'this could very well be insider trading at the worst, most horrific, most evil use you've ever seen in your entire life.'
For further information on the topic:
- Marc Chesney, Remo Crameri and Loriano Mancini: "Detecting abnormal trading activities in option markets", in: Journal of Empirical Finance, September 2015 [https://marcchesney.com/site/assets/files/1/detecting_abnormal_trading_activities_m__chesney-_r__crameri-_l__mancini_-_j__of_empirical_finance_-_komplet.pdf]
- Allen M. Poteshman: "Unusual Option Market Activity and the Terrorist Attacks of September 11, 2001", in:The Journal of Business, University of Chicago Press, July 2006 [https://jstor.org/stable/10.1086/503645?seq=17 / https://papers.ssrn.com/sol3/papers.cfm?abstract_id=370741]
- Wing-Keung Wong, Howard E. Thompson und Kweehong Teh: "Was there Abnormal Trading in the S&P 500 Index Options Prior to the September 11 Attacks?", in: Social Sciences Research Network, April 2010 [https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1588523 / https://ideas.repec.org/a/mfj/journl/v15y2011i1-2p1-46.html]
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Also see [Dutch/German] 2024 September 21 "Lars Schall interviewt Prof. Marc Chesney in Zürich zum Thema 9/11-Insidertrading" https://youtu.be/IlJDiZ481Do
I discovered and mentioned about this video in the comments in my last post https://old.reddit.com/r/PROGME/comments/1whp5te/a_young_trader_jumps_into_the_biggest_trade_of/ but I think what I stumbled upon, what Marc Chesney has presented, deserves more attention and recognition, and to tie into larger picture of things, including as it pertains/relates to the idiosyncratic risk that GameStop poses. [See the "Some GameStop (GME) idiosyncratic risk things:" part in my post https://old.reddit.com/r/PROGME/comments/1tdtv8j/how_do_backfloating_rate_loansdebt_relate_to/ for a relatively exhaustive list of official recognization identifiers signaling GameStop posing as an idiosyncratic risk.]