“The VIX settlement appears susceptible to manipulation, and that the aggregate evidence aligns itself with what one would expect to see in the case of market manipulation of certain settlements,”according to a new research paper from researchers John M. Griffin and Amin Shams in a nutshell there is evidence of VIX manipulation.

The VIX Index is constructed using the implied volatilities of a wide range of S&P 500 index options, which together show the market’s expectations of 30-day volatility. This index is used to calculate prices for a host of other financial instruments and hedging strategies. The widespread use of the the t makes it a target for manipulation, which has become increasingly common in recent years. Cases investigating LIBOR, FX, gold, and sliver manipulative trades have all been investigated recently, some with severe outcomes. However, the authors of the report note that while these manipulation events have attracted plenty of press attention, the has been little academic research examining specific features of these markets and the mechanisms that allow for VIX manipulation.

a512824904 / Pixabay

The VIX itself isn’t a wholly representative metric of volatility. An older paper byAnderson, Bondarenko, and Gonzalez-Perez (2015) demonstrates that the VIX index can exhibit deviations from true volatility due to the inclusion criteria of illiquid options. This figure, would, in theory, be hard to manipulate as futures and options on the VIX have a relatively large volume.

To influence the monthly settlement value of VIX derivatives, a speculator would have to move the price of lower-level out of the money SPX options at settlement value, to influence the outcome of expiring upper-level VIX derivatives.

VIX manipulation – who, what, where, why?

Even though the sheer size and complexity of the VIX market makes it difficult to manipulate, the paper argues that manipulators have left some prints in the data.