Whistle-blower says VIX gauge being manipulated
Urges investigation before investors suffer more losses
The VIX, a Wall Street “fear gauge” that measures volatility and was a big factor in wild stock price swings last week, is the target of a “manipulation scheme” that poses a risk to the stock market, an anonymous whistle-blower told U.S. regulators.
The whistle-blower, who has held senior investment positions at many of the world’s largest investment firms, through a letter sent by a Washingtonbased law firm, urged the Securities and Exchange Commission and Commodity Futures Trading Commission “to promptly investigate the matter before investors suffer additional losses due to this fraud.”
In the letter, the whistle-blower alleges that market manipulators are costing investors hundreds of millions of dollars each month by taking advantage of a “pervasive flaw” in options exchange trading at Cboe Global Markets in Chicago. The flaw “allows trading firms 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,” the whistle-blower claims.
The whistle-blower alleged that the recent market turmoil was partly driven by the scheme and “confirms the fraud and exposes the systemic risk to the entire equity market.”
The Cboe, via a spokesperson, said the whistle-blower’s claims “lack credibility.”
“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 ETPs, among other things,” the statement said. “As a result of these errors, we feel the conclusionary (sic) statements contained in this letter lack credibility.”
The market manipulation claim comes at a time of wild swings in markets due, in large part, to the rapid rise in VIX volatility. Many sophisticated Wall Street pros had been betting on volatility remaining low, so the quick change in market tone caused them to lose money.
The VIX, which shows the market’s expectation of 30-day volatility, is increasingly used by investors to make bets on the direction of volatility. Up until last week, the VIX had reflected market calm by trading near record lows of around 10. But volatility began heading higher in late January before the VIX’s recent explosion to the upside when it more than doubled to 37 on Feb. 5 (its biggest one-day jump ever).
The spike was partly to blame for the stock market’s wild gyrations last week, when the Dow Jones industrial average fell more than 1,000 points on two separate days.