It’s calculated from prices for S&P 500 Index options and reflects expectations for the magnitude of swings in the U.S. stock market. Wagering on the VIX has become increasingly popular in recent years, particularly after Cboe Global Markets Inc. introduced futures tied to the index more than a decade ago.
Last week, it emerged that an anonymous whistle-blower had alleged to the SEC and CFTC that “rampant manipulation” of the VIX is costing investors hundred of millions of dollars a month. Cboe, the Chicago-based exchange that controls the VIX, said the report’s conclusions lacked credibility and were “replete with inaccurate statements, misconceptions and factual errors.”
The whistle-blower’s claims, made through a Washington lawyer, follow a May report by a University of Texas professor and a Ph.D. student that asserted the process through which VIX futures are settled is subject to rigging.
Chris Concannon, Cboe’s president and chief operating officer, said Feb. 7 that he expected regulators to review some products that track VIX derivatives. Watchdogs would probably examine what information was disclosed to investors, with a particular focus on retail traders, he said on a call with analysts.
Cboe spokeswoman Hannah Randall declined to comment.
Among the issues being examined by the SEC’s enforcement division are why some exchange-traded products linked to the VIX didn’t trade as some investors expected, according to two of the people, who like others asked not to be named because the reviews are private.
On Feb. 5, the VIX posted an unprecedented 116 percent surge. A trader could’ve reasonably assumed the index would come back down the next day. And indeed it did, dropping 20 percent on Feb. 6. But if they bought Credit Suisse’s XIV or other investments that are designed to move in the opposite direction of the VIX at 4 p.m. on Feb. 5, they would have suffered losses the following day.
VIX Manipulation?
Outside the SEC’s enforcement unit, agency officials are taking a thorough look at products based on the VIX, including how the investments are structured, one of the people said. They are seeking to rule out manipulation as a factor in this month’s wild price swings, the person said.
The type of investments that Credit Suisse and ProShares issued are known as inverse exchange-traded products because they increase in value when some related asset falls, and vice versa. The space has grown significantly over the past decade, as such products now manage about $33.6 billion, compared with $1.7 billion in 2006, according to research company ETFGI.
Many don’t face the same rules as simpler securities that track the S&P 500 even though they often pursue more complicated investing strategies. Some utilize leverage, which can amplify investment gains but also magnify losses. BlackRock Inc., the world’s biggest provider of exchange-traded funds, has called for tougher regulations that would require financial companies to clearly spell out the risks associated with inverse products.