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(Reuters) - A scheme to manipulate Wall Street's fear gauge, VIX, poses risk to the entire equity market and costs investors hundreds of millions of dollars a month, a law firm on behalf of an "anonymous whistleblower" told U.S. financial regulators and urged them to investigate before additional losses are suffered.
Edited to add: "The letter lacks credibility as it has inaccurate statements, misconceptions and factual errors, including a fundamental misunderstanding of the relationship between the VIX Index, VIX futures and volatility exchange-traded products, CBOE said in a statement to Bloomberg."
That article alleges the VIX spike was the result of manipulation which led to losses for the funds and investors who used the inverse VIX ETPs. It derives its conclusion from the same research cited in an earlier Zerohedge article.
Lot of people got caught messing around in a product they didn't understand. When it feels too good to be true, it is. And in this industry, when there is someone like Goldman Sachs who figures out you are trapped, they will drive you into the ground to get every last $ of pain out of your hide. They care not at all that you are getting whipped like a rented mule. That's the way wall street works; Jim Cramer and his whining aside.
WSJ: federal regulators investigation into spoofed SPX options orders on Feb 5 jamming the VIX higher
This was just before they shuttered the two funds on activity after the close on the termination rule.
The topic of phantom orders and quote stuffing have from time to time come up during the bubble.
A lot of the people messing around in the products got in on the basis that the markets were being rigged and the VIX being jammed lower to boost the equity markets; i.e., somebody was repeatedly selling the VIX on a predictable basis and traders were shorting the VIX as a source of liquidity to purchase the SP.
Sure sounds like a Minsky Moment to me !
I'm thinking we'll be seeing more and more of these moments as creativity grows more rampant in ways of making money without investing becomes more prolific among the idle 1%ers.
CBOE disclaimer notwithstanding, Bob Pisani today said he had talked to the whistleblower. Sounded from his comments, the rigging is as described upthread.
Quote:
The whistleblower contends that most of the farthest out-of-the-money options only trade on days where there is a settlement for VIX futures and options, and he specifically is asking to investigate why this happens.
Because those far out-of-the-money options have very high implied volatility, the presence of those options drives the price of the VIX up.
His contention is that some traders go long VIX futures and then put in bids and offers way out of the money and profit when the VIX goes up just before settlement.
It would take some investigation, but nothing that is outside of normal for the CBOE or anyone with a Bloomberg terminal to quickly (less than 72 hours) ascertain if there is spoofing. However, this to me sounds like someone who got caught holding contracts & couldn't unwind quickly or enough to protect his blotter. The submitting of orders to manipulate the bid/ask & mid points and then cancelling those orders is not hard to track, and there are specific teams at each exchange searching for just that.
Hopefully we'll see very very soon if there was in fact any substance to the allegation.
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