Allegations that CBOE Global Market’s widely used VIX benchmark is being manipulated have drawn attention from regulators.
The nation’s top two markets watchdogs — the SEC and the Commodity Futures Trading Commission — opened investigations into the gauge of stock market volatility, according to people familiar with the matter.
One topic of examination is the monthly process through which the price of VIX futures contracts is calculated, according to the people, who asked not to be named because the matter is private. That monthly auction has been the focus of intense scrutiny this year, spurred by wild price swings and a 2017 research paper alleging the process is rigged.
The stakes are big. Billions of dollars of derivatives contracts and ETPs are tied to the index. Beyond that, it’s watched by many as a barometer of investor sentiment. The VIX tends to surge in times of turmoil.
Losses in CBOE’s shares accelerated Thursday after news of the investigation broke, declining 1.2%. The company reports quarterly results Friday.
The probes are preliminary and won’t necessarily lead to allegations of misconduct. CBOE hasn’t been accused by regulators of doing anything improper.
CBOE, the Chicago-based exchange that controls the VIX, said the professor’s allegations — which were reiterated May 1 in a Bloomberg Opinion column — are incorrect. Unusual auctions in recent months resulted in settlement prices far from prevailing prices for VIX contracts right before the auction, potentially meaning traders are gaming the process. CBOE has said such anomalies can be explained by normal trading. The exchange said it’s also taking a close look and would stamp out manipulation if it’s occurring.
“We are confident of our regulatory program, and that of our regulatory services provider, FINRA,” the company said in a statement, referring to the FINRA, which CBOE hired to help police its markets. “Both our regulatory program and FINRA maintain surveillance programs and dedicated teams of staff that surveil and monitor the trading activity and review every settlement across our futures and securities markets.”
The level of the VIX is set by prices for S&P 500 options that trade on CBOE’s exchanges. Some VIX futures contracts expire on the third Wednesday of every month, their final price calculated through an auction.
John Griffin, the University of Texas professor whose 2017 paper written with a grad student caught traders’ attention, believes someone is artificially suppressing the price of S&P 500 contracts, then profiting when the VIX settlement price comes in much higher. A more than $200 million distortion in the market was seen during the April 18 auction, he argues.
“Since the public release and publication of our academic paper last year, the settlement deviations have substantially increased,” he wrote in this week’s column. “We are concerned that market participants may be reading our paper as a how-to-manipulate manual.”
Research by Bloomberg News in January showed that of the 10 biggest gaps between the VIX settlement value and its closing level the night before, five came in 2017, including December’s, which was the biggest discount in 11 years.
The number of outstanding VIX futures has exploded as professional traders seek new ways to profit from movements in stocks. Open interest just before the monthly expiration averaged almost 611,000 contracts last year, 44% more than in 2016 and more than double the average of 240,000 in the decade before.
SEC spokeswoman Judy Burns declined to comment. Erica Elliott Richardson of the CFTC didn’t immediately respond to a request for comment.