VIX: Wall Street 'fear gauge' - manipulated or maligned?

NEW YORK (Reuters) - Cboe Global Markets CBOE.Z is taking several steps, including recruiting artificial intelligence, to put to rest concerns that its VIX volatility index was prone to manipulation and that contributed to a blow-up of some complex volatility products in February.

People walk by the Chicago Board Options Exchange (CBOE) Global Markets headquarters building in Chicago, Illinois, U.S., September 19, 2018. REUTERS/Michael Hirtzer


The VIX is a measure of expected 30-day volatility for U.S. stocks based on options on the S&P 500 Index .SPX.

VIX derivatives, such as futures and options, expire on the third or fourth Wednesday of every month and their final value is determined by the VIX’s monthly settlement, calculated on expiration day.

The VIX settlement price is calculated using actual opening trade price of a subset of S&P options. If there is no opening traded price for an option included in the calculation, an average of that option’s bid and ask price is used.


Traders in volatility products have long debated whether the settlement calculation can be influenced by someone artificially raising the price of the options going into the calculation.

These suspicions gained credence in May 2017, when John Griffin and Amin Shams of the McCombs School of Business at the University of Texas, Austin, published a paper noting significant spikes in trading volume in S&P 500 index options at the time of the VIX settlement.

Their research showed that just prior to the settlement, there were instances of large option buy or sell orders that did not occur at other times.

While the paper did not rule out all benign explanations, it said: “The aggregate evidence aligns itself with what one would expect to see in the case of market manipulation of certain settlements.”

Since the paper was published, more than a dozen lawsuits have been filed by various traders who say they lost money due to the alleged manipulation. In general, the lawsuits allege that various parties manipulated the VIX by placing S&P options orders with the intention to move the VIX settlement price.


The Cboe says that the jump in trading volume in S&P 500 index options around settlement does not necessarily point to manipulation.

One explanation for the spike in activity could be that traders, who own VIX derivatives about to expire, may be trying to replace the volatility exposure with S&P options.

The exchange says it has since increased the number of participants who can take part in the settlement auction to improve liquidity.

Orderly auctions in recent months soothed some nerves, but investors will be watching future settlements to gauge if the fix is working.


Some market participants have suggested that merely increasing liquidity or better policing the settlement auction might not be enough. The Cboe may need to change the VIX formula itself, they say.

The VIX’s reliance on a wide range of traded options, rather than just the ones closest to where the market is trading, leaves the door open to manipulation, they say.

Some traders can influence the settlement price by simply buying a lot of certain S&P options that otherwise would not attract any trading and not be included in the calculation of the VIX price, they argue.

Reporting by Saqib Iqbal Ahmed; Editing by Tomasz Janowski