Whistleblower: Wall Street’s ‘fear gauge’ is being manipulated

Someone has anonymously sent a letter to the U.S. Securities and Exchange Commission and the Commodity Futures Trading Commission claiming that one of the most popular measures of market volatility is being manipulated.

The letter claims that fake quotes for the S&P 500 index are skewing levels of the CBOE Volatility Index, which reflects bearish and bullish options bets 30-days in the future on the S&P 500 to gauge implied stock-market volatility.

An excerpt of the letter reads:

The flaw 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. This market manipulation has led to multiple billions in profits effectively taken away from institutional and retail investors and cashed in by unethical electronic option market makers.

That claim echoes those made by John Griffin, professor of finance at the University of Texas, and Ph.D. candidate Amin Shams in May 2017 in research [source] that says the cost of manipulating less-liquid SPX options would be more than paid for by a successful bet on the direction of the VIX.

“The paper is consistent with the whistleblower’s conclusion—that manipulators are moving prices of the SPX options by spoofing at settlement—entering quotes for trades that are never executed—to ‘paint the tape’ and, therefore, influence the value of expiring VIX derivatives,” said an American media report disclosing the allegations.

Jason Zuckerman, a lawyer representing the whistleblower, said his client is concerned about unfair market manipulation. “My client is concerned about VIX manipulation that has already caused investors to incur massive losses and is eager to prevent further harm from investors,” he said. [source]

Why this matters: Tens of millions of Americans are relying on the markets for their retirement incomes. For that reason alone, any claims that markets are being manipulated in ways that enrich some at the expense of others should be aggressively investigated. — JD

Jon E. Dougherty is a political, foreign policy and national security analyst and reporter with nearly 30 years of experience in both fields. A U.S. Army veteran of Operation Enduring Freedom, he holds BA in Political Science from Ashford University and an MA in National Security Studies/Intelligence Analysis from American Military University.

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