VIX Manipulation: Evidence from SPX Options and Market Data

Subscribe to newsletter

Market manipulation refers to intentional actions taken to distort the normal functioning of financial markets, often to benefit specific individuals or entities at the expense of others. These actions can include spreading false information, rigging prices, or creating artificial demand or supply. A notable example is the LIBOR manipulation scandal, where several major financial institutions colluded to manipulate the London Interbank Offered Rate (LIBOR), a benchmark interest rate used globally to set borrowing costs for trillions of dollars in loans and derivatives. By submitting false rate estimates, these banks influenced LIBOR to their advantage, impacting everything from mortgages to corporate loans.

Reference [1] examined the alleged manipulation of VIX, the volatility index. Market observers claimed that unidentified manipulators, aiming to influence the index, submitted aggressive orders in out-of-the-money (OTM) S&P 500 index options that are included in the VIX calculation. According to these allegations, manipulators profited from these artificial price movements through positions in VIX-related products such as options and futures.

The paper utilized three datasets obtained from the CBOE, covering the period from January 2011 to August 2018, to conduct the study. The author pointed out,

Subscribe to newsletter https://harbourfrontquant.beehiiv.com/subscribe Newsletter Covering Trading Strategies, Risk Management, Financial Derivatives, Career Perspectives, and More

Based on detailed investor-class level data for the period from January 2011 until August 2018, I examine several relations to identify potential manipulative activity during the VIX settlement period. I show that investors within the customer group (i.e., hedge funds and money managers) move prices during the special opening auction and align their price impact to profit from the resulting settlement deviations. Furthermore, I find that customers spread their trading volume across the options used in the calculation of the settlement value proportional to the respective VIX sensitivity. This is consistent with the optimal trading strategy to manipulate the VIX, as shown by Griffin and Shams (2018). Finally, customers’ exposure adjustments the day before expiration predict price movements during the subsequent special opening auction. This suggests that customers anticipate the direction of the VIX movements, which is consistent with manipulation.

Over the sample period from June 2011 to August 2018, settlement deviations caused market distortions that amount to $4.7 billion. Customers benefit from these deviations and earn $91 million over the respective period. These results stress the vulnerability of the VIX settlement process in its current form.

In summary, the author provided evidence supporting claims of VIX manipulation.

This article contributes to improving market transparency and functionality. Let us know what you think in the comments below or in the discussion forum.

References

[1] Manuel Leininger, Essays on Derivatives Markets, University of Konstanz, 2024, Chapter 1

Subscribe to newsletter https://harbourfrontquant.beehiiv.com/subscribe Newsletter Covering Trading Strategies, Risk Management, Financial Derivatives, Career Perspectives, and More

Further questions

What's your question? Ask it in the discussion forum

Have an answer to the questions below? Post it here or in the forum

LATEST NEWSNorth Star Network acquires leading casino affiliate Bojoko
North Star Network acquires leading casino affiliate Bojoko

NAXXAR, Malta, Feb. 18, 2025 (GLOBE NEWSWIRE) — North Star Network and Bojoko are delighted to announce the digital sports media group’s acquisition of the leading iGaming affiliation as NSN looks to take a decisive step into the casino space. The deal, which includes all…

Stay up-to-date with the latest news - click here
LATEST NEWSBOE’s Bailey Says Trump Tariffs Cause Unwelcome Bond Volatility
BOE’s Bailey Says Trump Tariffs Cause Unwelcome Bond Volatility

Bank of England Governor Andrew Bailey said he’d like to see less volatility in bond markets, much of which he puts down to a flurry of announcements around US tariffs.

Stay up-to-date with the latest news - click here
LATEST NEWSMedtronic earnings beat by $0.03, revenue fell short of estimates
Medtronic earnings beat by $0.03, revenue fell short of estimates
Stay up-to-date with the latest news - click here
LATEST NEWSUgoWork to showcase cutting-edge lithium-ion solutions and industry insights at ProMat 2025
UgoWork to showcase cutting-edge lithium-ion solutions and industry insights at ProMat 2025

Driving efficiency and cost savings in material handling QUEBEC, Feb. 18, 2025 (GLOBE NEWSWIRE) — UgoWork™, a leading provider of lithium-ion energy solutions for the material handling industry, is set to make an impact at ProMat 2025, March 17-20 at McCormick Place, Chicago, IL. Visit…

Stay up-to-date with the latest news - click here
LATEST NEWSAmerican Lamprecht Enhances Visibility for Air and Ocean Shipments Using Descartes Solution
American Lamprecht Enhances Visibility for Air and Ocean Shipments Using Descartes Solution

ATLANTA, Georgia and AMERSFOORT, The Netherlands, Feb. 18, 2025 (GLOBE NEWSWIRE) — Descartes Systems Group (Nasdaq:DSGX) (TSX:DSG), the global leader in uniting logistics-intensive businesses in commerce, announced that Illinois-based freight forwarder American Lamprecht is providing its customers with real-time visibility into the location and status…

Stay up-to-date with the latest news - click here

Leave a Reply