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Volatility: Has Wall Street Found One More Index It Can Rig?

Courtesy of Pam Martens

On Monday, an anonymous whistleblower sent a letter via his lawyer to the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) charging that traders were manipulating the stock market volatility index known as the VIX. The whistleblower said that a flaw exists in the VIX that “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 Chicago Board Options Exchange (CBOE) where VIX options and futures trade, quickly denied the claims.

This whistleblower claims come at a time when billions of dollars are blowing up around the globe because traders placed wrong-way bets that the VIX would maintain the low volatility levels it has enjoyed over multiple years as a result of low volatility in the stock market. As the stock market plunged more than a thousand points on two days last week and saw big intraday reversals on other days, traders nursed big losses as the VIX spiked.

The CBOE explains the VIX as follows: “The VIX Index is based on real-time prices of options on the S&P 500 Index (SPX) and is designed to reflect investors’ consensus view of future (30-day) expected stock market volatility. The VIX Index is often referred to as the market’s ‘fear gauge’.”

For a detailed academic paper by the creators of this concept, Menachem Brenner and Dan Galai, see here.

The new whistleblower’s claims come in an era when Wall Street firms have been charged with rigging other major indices and markets in brazen collusion schemes.

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