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To: ViperChick Secret Agent 006.9 who wrote (55775)	10/18/1998 10:58:00 PM
From: ViperChick Secret Agent 006.9	Respond to of 58727

System Melt-Up Post-Fed frenzy sparks glitch By Michael Santoli When it comes to the decisions of Alan Greenspan, no possible nuance or hidden intention goes unremarked upon by those in the financial markets. And so, as soon as his move to cut interest rates hit screens Thursday afternoon, the conjecture began. Some insisted it was timed to follow quickly on the announcement of a federal budget agreement. Bond traders groused that, by coming after the close of Treasury futures trading, the cut was scheduled carefully to have maximum effect in a less-liquid bond market. Did the precise time of the move, 3:14 p.m. EDT, have anything to do with the numerical approximation of pi? Whatever the chairman's true intentions, the bombshell caught options traders' attention by coming on the day before expiration and spurred such a frenzy that a volume spike may have caused systems glitches that led to a truncated close of the Chicago Board Options Exchange. Conspiracy theories, anyone? An indication of traders' urgency could also be seen on the American Stock Exchange, where the Spyders and Diamonds unit-trust shares trade. These instruments represent ownership of a piece of the S&P 500 or Dow Industrials, respectively, and offer two of the swiftest and cleanest ways to gain or shed equity exposure. Immediately after the rate cut hit the tape, the shares went screaming higher, quickly breaking loose from reality. The Spyders, priced at 1/10th the value of the index, shot as high as 107 1/4 . But the S&P never got above 1053, which would imply a "cash value" of a little over 105. Those two points or so qualify as a massive -- if fleeting -- gap for Spyders, which tend to trade with remarkable tightness to the index level, thanks to huge liquidity and constant arbitrage. The story was similar for the Diamonds, which hit 88 Thursday as the Dow's intraday peak of 8347 made for a fair value closer to 83 1/2 . Scott Fullman of Swiss American Securities figures a great deal of that outsize move represents frantic short-covering, both from investors actually short the shares or, very likely, traders who had sold S&P 500 (or S&P 100) call options. Anyone short the calls would want to cover in a hurry and buying Spyders is an easy way to do it, especially with a bottleneck at the CBOE. The exchange was hit with a systems outage at 3:58 p.m. EDT, four minutes before the equity options close and 17 minutes before the index options close. Unable to rectify the problem immediately, the CBOE halted index-option trading at 4:12 and held an ordered auction, called a closing rotation, in S&P and Dow options to set final prices -- a rare move. Yet another challenge for options traders to go along with forced liquidations by hedge funds, scuttled mergers haunting takeover players and recent volatility at nosebleed levels that strain option-valuation models. In a Friday ritual that has proven to be a trap in recent weeks, options traders were aggressively betting that Bankers Trust is in some trouble. Activity in near and out-of-the-money October put options -- these were set to expire in mere hours -- was hopping. Jon Najarian of Mercury Trading in Chicago reports that some of the puts were changing hands with searing implied volatilities above 100% on various calamitous rumors about the big New York bank. More than 2,000 put contracts traded at steep prices, with most of the action concentrated in the October 50s, some bought at prices above $1. With the stock at 52, such a trade amounts to a bet that BT shares would break significantly below 49 by Friday's close. The stock fell 5 1/2 to 51 3/8 on a day when bank stocks as a group were up better than 2%. For what it's worth, BT CEO Frank Newman released a statement Tuesday in reaction to a credit-agency downgrade that said the bank was "well-capitalized with a strong balance sheet" and "commands ample resources to weather the current market volatility." (See The Trader for more on Bankers.)