Whistleblower Exposes "Rampant Manipulation Of VIX"
While a lot of innocent explanations exist, “really, it is a mystery,” said Pravit Chintawongvanich, the head of derivatives strategy for Macro Risk Advisors.
“Some people rightly get confused about why the settle is seemingly out of context with the market.”
It actually seems like VIX manipulation is an inside-joke, as Hennessy of IPS says in a market dominated by professionals, everyone plays at his own risk.
“Like any market it is susceptible to manipulation by large participants but I think that most VIX traders understand that,” he said.
“2017 saw many settlements that came in points away from the previous day’s close value, and at this point you have to understand the risk you are taking on if you choose to let your options/futures position go into settlement.”
But now, Bloomberg reports a whistleblower has come forward telling U.S. regulators that a scheme to manipulate the VIX costs investors hundreds of millions of dollars a month.
In a letter Monday (see below) that his client found a flaw that allows traders “with sophisticated algorithms to move the VIX up or down by simply posting quotes on S&P options and without needing to physically engage in any trading or deploying any capital.” Billions in purportedly ill-gotten profits have been scooped up by “unethical electronic option market makers,” according to the letter.
The client wasn’t identified by name. He’s held “senior positions at some of the largest investment firms in the world,” according to the letter written by Jason Zuckerman of Zuckerman Law, who has appeared on Washingtonian magazine’s list of top whistle-blower lawyers in the nation’s capital.
Crucially, according to the letter, the whistleblower blames this VIX manipulation as the driver of last week's volatility complex collapse:
“We contend that the liquidation of the VIX ETPs last week was not due solely to flaws in the design of these products, but instead was driven largely by a rampant manipulation of the VIX index,”
CBOE quickly responded with a denial:
“We take our regulatory responsibilities and the oversight of our markets very seriously,”
“This letter is replete with inaccurate statements, misconceptions and factual errors, including a fundamental misunderstanding of the relationship between the VIX Index, VIX futures and volatility” exchange-traded products. “As a result of these errors, we feel the conclusionary statements contained in this letter lack credibility.”