Market Volatility: VIX is Under SEC Scrutiny

Posted On May 11, 2018 1:55 pm

Over the years, the stock market has seen its share of black swan events, from the flash to crash to the 2008 financial crisis, but the ‘volocalypse’ this past February still has people scratching their heads about what exactly happened to cause such a spike in market volatility.

And according to this report from Bloomberg, it appears the investigation is increasingly focused on thinking there was manipulation and that VIX related products might be rigged and the SEC is now getting involved.

Here’s where things stand.

The world got a stomach-churning lesson in the risks of market volatility after the VIX swung wildly in February.

Now, traders are experiencing another gut check as market regulators look into allegations that the index is being rigged.

News broke Thursday that the U.S. Securities and Exchange Commission and Commodity Futures Trading Commission opened probes into the VIX, one of Wall Street’s most widely used benchmarks. One area of investigation is the monthly auction that determines the price of futures contracts tied to the VIX, people familiar with the matter said.

“If they find something that is untoward, that’s a big deal,” said Amy Wu Silverman, managing director and equity derivatives strategist at RBC Capital Markets LLC. “VIX has become an industry standard, it’s almost synonymous to volatility. Questions like ‘What exactly is going on?’ make people nervous.”

The development is a blow to Cboe Global Markets Inc., which compiles the so-called fear gauge. Not only has the company been stung by the recent bouts of turbulence, but its crown jewel, the VIX, has become the focus of intense scrutiny after a 2017 research paper alleged its process is vulnerable to being manipulated.

In a statement, Cboe expressed confidence in its market oversight. It has said that allegations of manipulation are unfounded.

Preventing Misconduct

A sign anxiety is rising: Cboe officials have been leaning on compliance departments at firms that trade VIX options and futures, asking what they’re doing to prevent misconduct among customers, according to a person whose company has been queried. The inquiries began about a week ago, said the person, who asked not to be named.

While Cboe officials have repeatedly dismissed the claims as baseless, traders seem less certain. Punished first in February by concern that month’s histrionics would dent its volatility franchise, Cboe’s stock is down 15 percent in 2018, after rising 27 percent annually since the end of 2010 and never posting a down year. It’s fallen in four of the past five weeks.

 Related: Is a Black Swan Event Awaiting the Market? 

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Steve Smith

Steve Smith have been involved in all facets of the investment industry in a variety of roles ranging from speculator, educator, manager and advisor. This has taken him from the trading floors of Chicago to hedge funds on Wall Street to the world online. From 1987 to 1996, he served as a market maker at the Chicago Board of Options Exchange (CBOE) and Chicago Board of Trade (CBOT). From 1997 to 2007, he was a Senior Columnist and Managing Editor for TheStreet.com, handling their Option Alert and Short Report newsletters. The Option Alert was awarded the MIN “best business newsletter” in 2006. From 2009 to 2013, Smith was a Senior Columnist and Managing Editor for Minyanville’s OptionSmith newsletter, as well as a Risk Manager Consultant for New Vernon Capital LLC. Smith acted as an advisor to build models and option strategies to reduce portfolio exposure and enhance returns for the four main funds. Since 2015, he has worked for Adam Mesh Trading Group. There, he has managed Options360 and Earning 360, been co-leader of Option Academy, and contributed to The Option Specialist website.

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