KTMC Pursuing Antitrust Case Alleging VIX Manipulation

April 29, 2019

This past February, on behalf of a private investor, Kessler Topaz brought the first antitrust action alleging a conspiracy to distort prices of various derivative securities tied to the VIX. The firm soon brought a second complaint on behalf of another investor asserting violations of the Commodities Exchange Act in addition to violations of the Sherman Act. In the following months, numerous related actions involving the VIX were filed in multiple courts around the country. The Judicial Panel on Multidistrict Litigation then centralized all actions for pre-trial purposes in the Northern District of Illinois before Judge Shah.

The VIX is a widely-tracked but opaque index that measures the 30-day implied volatility of the financial markets. Its value is intended to reflect real-time pricing of put and call option contracts linked to the S&P 500 Index that trade on the CBOE. Various derivative instruments linked to the VIX – including options and futures contracts – trade exclusively on the CBOE and its Futures Exchange, operated by CBOE Global Markets, Inc.

By its design, the VIX is highly susceptible to market manipulation. The final settlement value of expiring VIX options and futures contracts is calculated on the third or fourth Wednesday of each month using only the opening prices of certain out-of-the-money SPX Options that expire 30 days after the relevant VIX options and futures expiration dates, known as the settlement price. This process takes place in an auction called the SOQ, for Special Opening Quotation. Given this complex formula, a change in the price – or bid/ask quotes – of SPX Options has a direct impact on the pricing of VIX and, correspondingly, the pricing of financial instruments linked to the index. By placing large or even high volumes of orders for OTM SPX Options, a trader can directly impact the VIX Settlement Price.

According to investor complaints, various parties – possibly including executives at the CBOE – colluded to fix the pricing of the VIX and the settlement price, depriving those properly trading in VIX-linked derivatives of a competitive marketplace and exposing them to artificial volatility. In carrying out their scheme, defendants allegedly opened long or short positions in VIX options and/or futures contracts prior to the SOQ closing; they also placed buy or sell orders in OTM SPX Options during the SOQ on each monthly settlement date; and they reaped illicit profits when the SOQ closed and the respective VIX options and futures settled at a manipulated price.

Investors’ claims are corroborated by significant empirical evidence, reflected in a study into the relationship between the VIX settlement price and the pricing of VIX Options and VIX Futures conducted by Prof. John M. Griffin of the McCombs School of Business at The University of Texas at Austin. Prof. Griffin is co-author of a 2017 paper in The Review of Financial Studies entitled “Manipulation in the VIX?”:

The case is pending in federal court in Chicago. Substantial briefing has occurred regarding the role of the Chicago Board of Exchange (CBOE). Plaintiffs are also seeking discovery in furtherance of their Commodity Exchange Act and conspiracy claims.

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