A whistleblower in a letter to the SEC and the Commodity Futures Trading Commission charges that one of the most popular measures of volatility is being manipulated. Cboe VIX, the company doing the measuring, denies it.
The whistleblower alleges through his attorney that the stock market’s “fear gauge” is being manipulated.
WHAT THAT MEANS
The letter claims fake quotes for the S&P 500 index are skewing the Cboe Volatility Index (VIX). VIX reflects bearish and bullish options bets 30-days in the future on the S&P 500 to gauge implied stock-market volatility.
The flaw allows trading firms with sophisticated algorithms to move the VIX up or down. All they have to do is post quotes on S&P options. They don’t need to physically engage in any trading or deploying any capital. This market manipulation has led to multiple billions in profits effectively taken away from institutional and retail investors. It’s cashed in by unethical electronic option market makers.
Why is this important? Because this index is a widely followed barometer of anticipated short-term stock market volatility.
In simpler terms, the claim is that manipulators are moving prices of the S&P options by entering quotes for trades that are never executed to “paint the tape”and alter the value of expiring Volatility Index derivatives.
John Griffin, professor of finance at the University of Texas and Ph.D. candidate Amin Shams in May 2017 documented the same illegal manipulation described by the whistleblower.
Jason Zuckerman, attorney at law firm, Zuckerman Law, who is representing the whistleblower, says his client is very concerned about unfair markets.
Some of us are worried about political motivations.