Whistleblower Exposes "Rampant Manipulation Of VIX"
We first exposed the "conspiracy fact" that VIX manipulation runs the entire market back in 2015 as the ubiquitous VIX-crushing algo-runs coincided with a non-stop shorting of VIX futures by a seemingly bottomless-pocketed player in the market... which happened to coincide with the arrival of Simon Potter as the head of The New York Fed's trading desk...
Probably just a coincidence, right?
Then, in May of last year we academic confirmation of the rigged nature the US equity market's volatility complex, when a scientific study found "systemic VIX auction settlement manipulation."
Two University of Texas at Austin finance professors found "large transient deviations in VIX prices" around the morning auction, "consistent with market manipulation."
Griffin and Shams calculate that "the size of VIX futures with open interest at settlement is on average 5.7 times the size SPX options traded at settlement, and it is 7.3 times for VIX options that are in-the-money at settlement."
So if you are a trader who owns a lot of the market in VIX futures, you could push around a large dollar value of futures by trading a small dollar value in options. This is particularly true because the S&P option volume is divided among many strikes, and the illiquid deep out-of-the-money S&P 500 options have a big influence on the VIX: You can move the price of those options a lot with relatively small trades, and those price changes have a disproportionate effect on the VIX.
While this was immediately played down by CBOE, and the subject quickly disappeared from the headlines - because VIX was dropping incessantly and stocks were going up, up, up - until VIX flash-crashed rather awkwardly into the morning auction settlement in mid-December, bring the chatter of manipulation back to life...
Bloomberg data show that of the 10 biggest gaps between the VIX settlement value and its closing level the night before, five came in 2017, including December’s, which was the biggest discount in 11 years.
On monthly expirations, settlement occurred outside the VIX’s same-day trading range 42 percent of the time last year, the most since 2005. The average occurrence was 15 percent in the decade through 2016.