While the re-opening of the Wall Street exchange, inside a week of the terrorist attack, was trumpeted around the world, an equally significant event was taking place down the road in Philadelphia. Dealing in options could not begin in its normal home, close to the site of the Twin Towers, and so it got under way in the Philadelphia Exchange Building, as a result of a pre-arrangement between US exchanges.
During the four days that trading was suspended across the Atlantic, Europe’s exchanges met the challenge. In Frankfurt the derivatives market experienced high liquidity during the week following the terrorist attack. “On the one hand the capital markets, and on the other the index products both showed plenty of activity. The three main indices, the Dow Jones Euro Stoxx, the Dax and the Nemex futures and options exhibited this high trading level. This meant most of our traders were doing their risk management over the index products. The banks and the institutional investors also had to hedge themselves with the bond futures,” explained Uwe Velten at the Deutsche Börse.
Eurex, the world’s largest derivatives market had seen a massive daily average for a number of weeks, and this continued in the days following the New York disaster.
It was a similar story at Liffe. Since one of the main reasons for going to the derivatives market is to offset risk, and hedge positions. Although it is difficult to assess what the customers end game is, the volume in the contracts immediately following the incident in New York suggested risk off-set.
The exchange’s Caroline Denton said: “All year we have had uncertain conditions and so in the derivatives market we have seen a lot of volume and volatility, and a great deal of liquidity. Immediately after the incident we suspended trading in equity products which were associated with the US. Across our other contracts we had slightly more activity than normal, but not unusually so since we had had high trading days the week before. There was some increased volatility immediately after the attack, which meant high liquidity, but then it settled down.”
Amsterdam also saw heavy trading. Jon Abbink at Van der Moolen & Co said: “Remember that derivatives trading here is still a pit, and so was less affected in terms of systems failure, which is also why New York has been able to open reasonably well. In an environment where prices are right in front of you, and transmitted between humans, for all the other problems in getting orders, at least you know the price is real. That will always be a problem with an electronic exchange.”
In terms of options there was a huge spike in short term volatility, including a significant move in up to six-month volatility. Beyond that investors seem to have taken the view that they will respond to events as they develop rather than take a long-term view. Consequently the maturity curve from front to back, from now until two years time has become extremely steep in all markets. “People are buying the front, in order to play the volatility, and are still short at the back waiting to see what happens,” said a source at Merrill Lynch in London. “Really they haven’t moved, maybe one or one and a half volatility points over that period. The front has moved in certain indices by 50 to 60 points. What we are seeing are people covering their short put risk positions, people who have bought puts and gone through their strikes have come in to roll their risks, they want to buy out of the money puts and sell the ones they have to make profits. This has meant that the skew of the derivative instruments has become steeper, as well as the maturity.”
A lot of the trades seem to be investors covering their risk, rather than speculative trades, although many analysts feel that may well come later.

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