VIX Manipulation: Evidence from SPX Options and Market Data

Market manipulation refers to intentional actions taken to distort the normal functioning of financial markets, often to benefit specific individuals or entities at the expense of others. These actions can include spreading false information, rigging prices, or creating artificial demand or supply. A notable example is the LIBOR manipulation scandal, where several major financial institutions colluded to manipulate the London Interbank Offered Rate (LIBOR), a benchmark interest rate used globally to set borrowing costs for trillions of dollars in loans and derivatives. By submitting false rate estimates, these banks influenced LIBOR to their advantage, impacting everything from mortgages to corporate loans.

Reference [1] examined the alleged manipulation of VIX, the volatility index. Market observers claimed that unidentified manipulators, aiming to influence the index, submitted aggressive orders in out-of-the-money (OTM) S&P 500 index options that are included in the VIX calculation. According to these allegations, manipulators profited from these artificial price movements through positions in VIX-related products such as options and futures.

The paper utilized three datasets obtained from the CBOE, covering the period from January 2011 to August 2018, to conduct the study. The author pointed out,

Based on detailed investor-class level data for the period from January 2011 until August 2018, I examine several relations to identify potential manipulative activity during the VIX settlement period. I show that investors within the customer group (i.e., hedge funds and money managers) move prices during the special opening auction and align their price impact to profit from the resulting settlement deviations. Furthermore, I find that customers spread their trading volume across the options used in the calculation of the settlement value proportional to the respective VIX sensitivity. This is consistent with the optimal trading strategy to manipulate the VIX, as shown by Griffin and Shams (2018). Finally, customers’ exposure adjustments the day before expiration predict price movements during the subsequent special opening auction. This suggests that customers anticipate the direction of the VIX movements, which is consistent with manipulation.

Over the sample period from June 2011 to August 2018, settlement deviations caused market distortions that amount to $4.7 billion. Customers benefit from these deviations and earn $91 million over the respective period. These results stress the vulnerability of the VIX settlement process in its current form.

In summary, the author provided evidence supporting claims of VIX manipulation.

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References

[1] Manuel Leininger, Essays on Derivatives Markets, University of Konstanz, 2024, Chapter 1