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Market Volatility: VIX is Under SEC Scrutiny

Posted On May 11, 2018 1:55 pm
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While trading in VIX options set a record high during the first quarter, as did related S&P 500 contracts, investors have liquidated positions in VIX futures, with open interest sinking to the lowest levels in about two years. Volume slowed in April to the lowest level in more than a year, according to data compiled by Bloomberg.

Cboe owns the intellectual property underlying the VIX and charges money to use VIX-related products it created. If you buy an options or futures contract, you usually pay a transaction cost that the Cboe collects, while VIX-related exchange-traded notes and funds owe a licensing fee. Trading fees from VIX futures and options, added together, make up roughly 25 percent to 30 percent of the Cboe’s revenue, depending on the quarter, according to Christopher Allen, senior research analyst at Rosenblatt Securities.

Over the years, allegations of VIX rigging have occasionally surfaced, though were seldom taken seriously by professionals. The latest claims have piqued more interest among traders who have been baffled as settlement values increasingly occurred far away from prevailing market prices.

Research published 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.

Leaders of the exchange, among the most respected in the industry, are on the defensive, assuring traders in a letter last week that no manipulation has occurred while at the same time vowing to improve the process by which the auction is conducted. It was signed by Ed Tilly, the chief executive officer, and Cboe President Chris Concannon, once an SEC lawyer.

In response to news of the probe, the company said in a statement that it is “confident of our regulatory program, and that of our regulatory services provider, Finra.” The reference is to the Financial Industry Regulatory Authority, 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,” according to the statement.

“The VIX and the VIX-related products have been in the spotlight,” Allen said. “It’s obviously important.”

 Related: 3 Tricks to Beating the May 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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