On the morning of December 20th, we noted that VIX crashed at the open of the cash market.

VIX crashed to 8.90 as cash markets opened…

In context of the prior and following days, it was an ‘odd’ gap down move that was immediately defended by most as “just a fat finger” except it wasn’t and it was critical to the settlement price as billions of VIX futures were set to expire.

This was certainly On the morning of December 20th, we noted for the near-record short speculative VIX futures positioning.

But, as Bloomberg reports, it reignited claims that VIX was yet another manipulated market that had been highlighted by a critical academic study we detailed here.

While the CBOE has seen nothing to alter its view that the claims are baseless, December’s events gave the conversation another stir.

“There couldn’t have been a more appropriate cherry on top of the 2017 cake,” said Patrick Hennessy, head trader at IPS Strategic Capital in Denver. “The VIX settlement in December was one for the books.”

However, criticism (or skepticism) of the settlement process left the realm of the academic and theoretical last week when its futures exchange fined a Chicago-based trading firm following allegations it submitted improper bids to volatility auctions on emerging-market stocks and oil. 

highlighted by a critical academic study we detailed here

CBOE gets an official settlement level of the VIX based on a special monthly settlement auction of S&P 500 options. The auction runs from 7:30 a.m to 8:30 a.m., Chicago time. Traders submit bids and offers for S&P 500 options, the auction matches buyers and sellers to find clearing prices, and the prices of those S&P 500 options are used to compute the official settlement level of the VIX.

Guess what?

At the settlement time of the VIX Volatility Index, volume spikes on S&P 500 Index (SPX) options, but only in out-of-the-money options that are used to calculate the VIX, and more so for options with a higher and discontinuous influence on VIX.

We investigate alternative explanations of hedging and coordinated liquidity trading. Tests including those utilizing differences in put and call options, open interest around the settlement, and a similar volatility contract with an entirely different settlement procedure in Europe are inconsistent with these explanations but consistent with market manipulation.