UPDATE: Traders Bought Options Hours Before Hilton Deal Dow Jones July 05, 2007: 01:32 PM EST (Updating with additional details, comments on need for more regulation in 11th paragraph; updates prices) By Mohammed Hadi Of DOW JONES NEWSWIRES NEW YORK -(Dow Jones)- News that Hilton Hotels Corp. (HLT) agreed to be bought by Blackstone Group (BX) was preceded by heavy trading in call options that have already yielded big profits for their buyers. The timing and intensity of the activity has some option traders crying foul, arguing that this is just the latest in a series of deals to be preceded by trading that appeared to be informed by knowledge of an upcoming event. "This one stinks of insider trading," said Steve Sosnick, equity risk manager at the Timber Hill LLC market making unit of Interactive Brokers Group. A spokesman for Blackstone had no comment on the trading, and a spokeswoman for Hilton wasn't available. The SEC wouldn't comment on specifics, but said it has a very aggressive insider trading enforcement program. "We bring more insider trading cases than any regulator in the world," SEC spokesman John Nester said. "That said, insider trading is a very difficult behavior to successfully prosecute." Heavy Trading Options to buy nearly 22 million Hilton shares changed hands in the half-day of trading Tuesday before the company later said Blackstone will buy it for $ 47.50 a share. That's almost eight times the average daily volume of these call options during the month of June. The buying was most concentrated, according to data from TradeAlert.com, in options that convey the right to buy Hilton shares for $40 between now and late August. Traders also bought calls that give them the right to pay $35 for Hilton shares in the next three weeks. Hilton's shares also rose Tuesday, by about 6.4% , to $36.05. The stock jumped another 26% Thursday to $45.47, sending the price of August $ 40 calls up by about 570%. According to TradeAlert.com, about 5,200 positions in these contracts were added on Tuesday - representing 520,000 shares of stock. The gains in those positions Thursday amounted to about $2.5 million. Tuesday's trading wasn't the first time that Hilton has been targeted by call option buyers. In fact, the company and rivals Marriott International Inc. (MAR) and Starwood Hotels & Resorts Worldwide Inc. (HOT) have long been speculated as targets of private equity firms. One analyst, Jeffries & Co.'s Lawrence Klatzkin recently flagged the company's price as undervalued, including making it a "pick of the week" on Tuesday. Though he didn't say Hilton would be the next buyout target, Klatzkin did cite the prices private-equity companies recently paid for other companies in the lodging sector. Still, traders say the timing of the trades on Hilton speak for themselves. "You have to look at the timing," said Matt Calder, senior trader at Toro Trading LLC, a market maker on the Chicago Board Options Exchange and Philadelphia Stock Exchange. "When there's deal speculation in an industry group that is really a natural kind of thing, it can often be speculation for speculation's sake," Calder said. "But when something isn't being talked about - and then one day all of a sudden five times the normal volume trades, that's when it's ridiculous. There's no way that you just happen to be that lucky." Calls For More Enforcement The deal for Hilton will only the latest in a streak of private equity buyouts with the distinction of having been preceded by suspect trading, and the Securities and Exchange Commission has brought some charges against individuals who profited from these deals. But market makers say more has to be done. They are frustrated because the SEC's enforcement actions don't seem to be keeping pace with what circumstantial evidence indicates is an increase in instances of insider trading. Market makers' job is to be a ready buyer and seller of options in the market. When prices move suddenly after merger news emerges, they can get hurt badly. Market makers can take steps to protect themselves against such losses, hedging positions and charging higher prices for the options in demand, but think regulators need to do more to discourage the trading. Traders don't think it should be that difficult, particularly in cases where the list of investment bankers, lawyers and others with knowledge of a deal is finite. "You don't have a huge amount of parties who should've known about this deal," Sosnick said of the Hilton buyout. "Perhaps this is one where enforcement can arise." Illegal trading in the options market in particular is also policed by the Options Regulatory Surveillance Authority, which is housed at the Chicago Board Options Exchange. A spokesman for ORSA said the agency routinely investigates unusual trading, but wouldn't comment further.