‘We want to be clear that we were disappointed with the [unusual VIX event on April] 18th, and we saw it as a liquidity challenge and nothing more. We’re out now trying to enhance that liquidity.’
That’s the stance taken Friday by the Chicago Board Options Exchange, part of Cboe Global Markets Inc.
CBOE, -2.81%
as allegations its widely used VIX stock-market volatility benchmark is manipulated continued to swirl.
The comments were made as part of Cboe’s quarterly earnings call, after it reported strong earnings. Despite the quarterly numbers, Cboe shares fell Friday and are down some 17% so far in 2018.
The VIX
VIX, -7.11%
is designed to track broader stock-market investor anxiety and tends to move in the opposite direction of the benchmark S&P 500 index
SPX, +1.28%
Known as the “fear” index, some market participants simply watch its move as a temperature reading on market sentiment; others, mostly sophisticated investors, tap it as a hedge. Used since 1993, the VIX is Cboe’s marquee franchise; spinoffs include futures, options and other exchange-traded products.
The number of VIX futures contracts outstanding has declined since early February despite the market’s generally volatile performance. VIX market hiccups took place that month and again in April.
And now the top market watchdogs — the U.S. Securities and Exchange Commission and the Commodity Futures Trading Commission — have reportedly opened investigations into the gauge, people familiar with the matter told Bloomberg News this week.
In February, the Wall Street Journal reported that the Financial Industry Regulatory Authority, or Finra, is scrutinizing whether traders placed bets on S&P 500 options to influence prices for VIX futures, in effect forcing greater movement in the index.
Read: Have stocks been volatile this earnings season? Yes and no
As for any alleged manipulation, traders trying to move prices for VIX futures and options could achieve this by betting on the options at a special auction that takes place each month to calculate settlement values. Volume tends to spike around the time of the settlement auction and only in S&P 500 options that tend to have an outsize influence on the VIX’s final level, according to research by John Griffin and Amin Shams, professors at the University of Texas at Austin who wrote a paper on the topic in May.
Cboe has said the University of Texas professors’ research is based on “fundamental misunderstandings” about the VIX and its derivatives, the Wall Street Journal has reported. The exchange also said it has safeguards that make it difficult to manipulate the volatility gauge.
Cboe CEO Edward Tilly looked to soothe investors again on Friday, saying on the earnings call that VIX “is working beautifully.”
Both investors in Cboe shares and in the products it trades have a stake in how these developments shake out.
J.P. Morgan stock analyst Kenneth Worthington said in an April note that “we could see a meaningful decline in VIX futures and options volumes in coming months despite current strong volumes. Given VIX has been a key growth driver for CBOE, we also see the potential for a deterioration in CBOE valuation.”
Source : MTV
