BloombergMarkets
Odd Spike in Wall Street Fear Gauge Awakens Manipulation Debate
By
Luke Kawa
April 18, 2018, 3:23 PM EDT
VIX increase around settlement time seems incongruous
MRA strategist sees evidence the gauge may have been ‘gunned’
The monthly settlement of the VIX has left investors feeling decidedly unsettled.
Pravit Chintawongvanich, head of derivatives strategy at Macro Risk Advisors, says the VIX, or Cboe Volatility Index -- a gauge of the implied volatility of the S&P 500 Index derived from out-of-the-money options -- was “gunned.” That is, it was intentionally pushed higher.
A massive bid for protection against a tumble in equities caused the prices of put options to soar in early trading on Wednesday, effectively forcing up the official settlement level of what’s known as Wall Street’s fear gauge. The trading had an outsized impact on which VIX options expired in the money or worthless this month.
READ: Billions in VIX-Rigging Profits? Bruised Index Takes New Hit (Feb. 14)
Cboe Global Markets Inc. declined to comment. Last month, Cboe CEO Ed Tilly said at a conference that “the integrity of our VIX products and markets is paramount. And, if our regulatory team were to uncover any manipulation, it would be rooted out, swiftly and decisively. Period.”
Cboe shares fell as much as 0.7 percent on Wednesday as the S&P 500 gained 0.3 percent.
The VIX typically moves inversely to the S&P 500 Index. But in the minutes before the open, both futures tied to the benchmark U.S. stock gauge and spot VIX were trading to the upside.
“Around 9:15, suddenly a bid emerged for the extremely far downside options, pushing the early indication [of the VIX] up 1 point," Chintawongvanich said. “By 9:30, the early indication was around 17.50, up over 2 points from the 9:00 a.m. level, despite S&P futures remaining unchanged."
Roughly $2.1 million was spent bidding up put options with strike prices that had 50 percent downside from current levels, the strategist calculates.

By comparison, the cumulative dollar value of options traded during the March VIX settlement followed a much more bell-curve shape, without nearly as much activity in the left tail.

A massive trade of 13,923 May puts on the S&P 500, with a strike price of 1200, took place just as markets opened at 9:30 a.m. Before Wednesday, the five-session average volume for this option was just 22.
The S&P 500 options bought are likely to be worthless at expiry, but their cost might be lower than what the investors would have lost on the other position, potentially making Wednesday’s trade a net plus for their profit and loss statement. Meanwhile, the tail risk embedded in taking the other side of that trade by selling that downside protection is difficult for portfolio managers to swallow -- particularly after February’s explosion in the VIX.
In the past, Cboe has said that supposedly telltale volume spikes in S&P 500 contracts at auction are a natural result of traders replacing VIX futures with options exposure. It’s possible widening gaps in settlement prices reflect not manipulation, but simply the influence of market makers conducting such trades.
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Odd Spike in Wall Street Fear Gauge Awakens Manipulation Debate
By
Luke Kawa
April 18, 2018, 3:23 PM EDT
VIX increase around settlement time seems incongruous
MRA strategist sees evidence the gauge may have been ‘gunned’
The monthly settlement of the VIX has left investors feeling decidedly unsettled.
Pravit Chintawongvanich, head of derivatives strategy at Macro Risk Advisors, says the VIX, or Cboe Volatility Index -- a gauge of the implied volatility of the S&P 500 Index derived from out-of-the-money options -- was “gunned.” That is, it was intentionally pushed higher.
A massive bid for protection against a tumble in equities caused the prices of put options to soar in early trading on Wednesday, effectively forcing up the official settlement level of what’s known as Wall Street’s fear gauge. The trading had an outsized impact on which VIX options expired in the money or worthless this month.
READ: Billions in VIX-Rigging Profits? Bruised Index Takes New Hit (Feb. 14)
Cboe Global Markets Inc. declined to comment. Last month, Cboe CEO Ed Tilly said at a conference that “the integrity of our VIX products and markets is paramount. And, if our regulatory team were to uncover any manipulation, it would be rooted out, swiftly and decisively. Period.”
Cboe shares fell as much as 0.7 percent on Wednesday as the S&P 500 gained 0.3 percent.
The VIX typically moves inversely to the S&P 500 Index. But in the minutes before the open, both futures tied to the benchmark U.S. stock gauge and spot VIX were trading to the upside.
“Around 9:15, suddenly a bid emerged for the extremely far downside options, pushing the early indication [of the VIX] up 1 point," Chintawongvanich said. “By 9:30, the early indication was around 17.50, up over 2 points from the 9:00 a.m. level, despite S&P futures remaining unchanged."
Roughly $2.1 million was spent bidding up put options with strike prices that had 50 percent downside from current levels, the strategist calculates.

By comparison, the cumulative dollar value of options traded during the March VIX settlement followed a much more bell-curve shape, without nearly as much activity in the left tail.

A massive trade of 13,923 May puts on the S&P 500, with a strike price of 1200, took place just as markets opened at 9:30 a.m. Before Wednesday, the five-session average volume for this option was just 22.
The S&P 500 options bought are likely to be worthless at expiry, but their cost might be lower than what the investors would have lost on the other position, potentially making Wednesday’s trade a net plus for their profit and loss statement. Meanwhile, the tail risk embedded in taking the other side of that trade by selling that downside protection is difficult for portfolio managers to swallow -- particularly after February’s explosion in the VIX.
In the past, Cboe has said that supposedly telltale volume spikes in S&P 500 contracts at auction are a natural result of traders replacing VIX futures with options exposure. It’s possible widening gaps in settlement prices reflect not manipulation, but simply the influence of market makers conducting such trades.
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