Anonymous ‘whistleblower’ claims ‘rampant manipulation’ of Vix index
Cboe says the claims ‘lack credibility’
A self-professed whistleblower has contacted US regulators alleging manipulation of the Vix, a volatility index at the heart of last week’s market turmoil.
The Vix, run by the Chicago Board Options Exchange, last week spiked to levels twice its long term average following a long period of calm, stinging any investors that had used it to bet against wobbles in stock markets.
An alleged flaw in the Cboe’s volatility index “allows trading firms with sophisticated algorithms to move the Vix up or down by simply posting quotes on S&P options and without needing to physically engage in any trading or deploying any capital,” lawyers for the whistleblower claim in a letter to US financial watchdogs the Securities Exchange Commission and the Commodity Futures Trading Commission.
The lawyers from Washington-based Zuckerman Law say they represent an “anonymous whistleblower who has held senior positions at some of the largest investment firms in the world”.
The lawyers allege that the “market manipulation scheme” had exacerbated last week’s losses for investors in financial products that made profits when the Vix was low but lost value when Vix levels rose.
Credit Suisse closed one such exchange-traded product, once worth $2.2bn, last week after the instrument lost 96 per cent of its value in the equities sell-off. Nomura, a Japanese bank, also shuttered a similar product.
The Zuckerman lawyers told regulators “we contend that the liquidation of the Vix [exchange-traded products] last week was not due solely to flaws in the design of these products, but instead was driven largely by a rampant manipulation of the Vix index.”
The Cboe dismissed the claims: “This letter is replete with inaccurate statements, misconceptions and factual errors, including a fundamental misunderstanding of the relationship between the Vix Index, Vix futures and volatility” in exchange-traded products, it said in a statement.
“As a result of these errors, we feel the conclusionary statements contained in this letter lack credibility.”