A trader or traders in the options market made an estimated profit of 400 percent betting on a big move in Fortress Investment Group shares on Tuesday, just hours before the private equity firm announced a $3.3 billion takeover offer from SoftBank.
The size of the bets raised eyebrows and led several options market experts to suspect that someone was trading on information that had leaked about the deal, which surprised the private equity industry when it was announced later in the day.
"There was a biggish trade and then there was a colossal trade," said Ophir Gottlieb, chief executive of Capital Market Laboratories. "This is a pretty glaring example of likely impropriety."
Options trading activity was more than eight times the normal level ahead of the deal's public announcement. Equity trading volume was also unusually high on Tuesday, spiking initially in the minutes before the first options trade and then continuing through the afternoon as speculators noticed and then aped the activity.
The developments were noted with dismay inside Fortress, where the share price appreciation was eroding the premium that its founders would be able to boast SoftBank was paying over the prevailing market price. The $8.08-per-share takeover price, announced after the market closed, compared to $5.83 at the start of the day but only to $6.21 at the close of trading.
Much of the options trading volume that went through on Tuesday appears to have been taken off on Wednesday, suggesting that whoever made the bet has been taking profits on the position, said Jim Strugger, head of derivatives products at MKM Partners.
Mr Strugger said the pre-deal trading was "peculiar", although with Fortress due to report results on February 23, it could be that it was a coincidence and an investor was betting instead on improved earnings.
The total volume of Fortress call options traded on Tuesday was 9,601, according to Trade Alert, an options analytics data provider, a jump from the average daily volume of 1,124 contracts.
Purchases of short dated call options for Fortress expiring in March followed a spike in trading activity in Fortress shares, several hours before news of the takeover became public.
Traders in New York said they spotted unusual purchases of Fortress options at around 12.22pm.
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Henry Schwartz, chief executive of Trade Alert, said that it was unclear whether the options market had responded to the rise in Fortress shares.
"It's hard to determine if the option trader may have taken a cue from the stock, or if perhaps the same buyer was active in both options and stock," he said. "The buyer used a smart router for most of the volume, which is a way to maximize liquidity without exposing the identity of the buyer," he said.
Mr Schwartz and Mr Gottlieb both estimated that the profit on the trade was in the region of 400 per cent.
The large amount of trading nearly doubled the quantity of calls outstanding, with the trading volume ahead of the deal being the largest in one day since April 2016.
Large options trades ahead of takeover announcements are closely scrutinised by financial regulators as they have in the past been linked to insider trading cases.
In 2014, a former executive of Banco Santander was fined by the US Securities and Exchange Commission for buying up speculative derivatives in PotashCorp ahead of BHP Billiton making an offer for the company.
The SEC declined to comment on the Fortress trades. Fortress and SoftBank declined to comment.
Call options give the owner the right to buy shares in a company for a fixed price by a certain date. If the price does not exceed the strike price by that date they expire worthless.
By buying options expiring in only a month — instruments that are treated as highly speculative by traders due to their short duration and sensitivity to movements in the price of the underlying shares they are linked to — the purchasers managed to guarantee the largest possible gain on any instrument linked to the value of Fortress's shares.