'No evidence yet' of terror bid to profit on shares

The City’s watchdog today said it would leave ‘‘no stone unturned’’ in investigating whether terrorists profited from the attacks in the US.

There have been fears that people with prior knowledge of the attack traded in firms such as airlines and insurers before the strikes, hoping to profit from a fall in the share price in a sophisticated dealing method.

Howard Davies, chairman of the Financial Services Authority, today said it, in common with a number of other regulators around the world, began investigating these allegations immediately after the outrage.

The watchdog looked at trading activity on the London Stock Exchange, derivatives exchange LIFFE and the International Petroleum Exchange, focusing particularly on airline and insurance stocks and on oil prices.

However, it said so far it had not found any suspicious instances.

"Trading volumes in these markets in the week or so ahead of the attack were ‘‘high but not uncommonly so’’, he said.

He said there were a few instances where individual stocks were traded in unusually sizeable amounts, and this ‘‘may have been because funds were positioning themselves ahead of an expected economic downturn’’.

‘‘But we are following up on these cases, establishing the professional counterparty involved and the name of their client,’’ he said.

He added: ‘‘So far, it has been possible to establish rapidly for a number of these cases that there is a ready explanation.

For example, a sizeable put option trade in the shares of a British airline turned out to have been on behalf of another airline, as part of an overall hedging strategy.’’

An FSA spokesman said: ‘‘So far we haven’t found any evidence but it is not through lack of looking. Instances that have popped up, for example British Airways, found a legitimate explanation.’’

Mr Davies pledged to continue to search and asked firms with any information to come forward, and also to ensure they were complying with money laundering legislation.

‘‘We will leave no stone unturned in our search,’’ he said.

Mr Davies also defended the practice of ‘‘short selling’’ - when traders borrow shares and sell them in the hope the price will go down, at which point they buy them back at a lower price.

He said short-selling - which has been blamed for a variety of problems, including some of the recent fall in share prices - was in normal circumstances a ‘‘natural and important feature of the market’’.

However he added there had been some ‘‘unattractive examples of aggressive short selling in recent weeks’’.

‘‘Consistent with our new powers over market abuse which come into effect on 1 December, if we find specific examples of abusive, and not just aggressive, practice in future, we will act.

But we do not see a case for a general prohibition. It has to be for individual stock holders to exercise their own judgment as to whether, to whom and on what terms they will lend,’’ he added.