VIX Under Investigation for Possible Market Manipulation

On January 14, 2019, it was reported that the Volatility Index (VIX) is under investigation by the SEC and CTFC for possible market manipulation. This is as a response to the Feb 5 Dow Jones Crash that saw billions in losses for investors.

Cause and Effect

Investments on VIX are currently under investigation from regulators to determine if any manipulation contributed to the losses recorded on VIX exchange-traded products offered by a number of firms.

This investigation is being carried out by the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) and has been ongoing since February 2018 after there was a sudden increase in volatility, leading to the loss of billions for investors.

At the SEC, the investigation is being carried out by its enforcement division who typically enter the fray when there are suspicions of misconduct or breaking of securities laws. However, according to the source, no specific companies have been put under investigation as of yet.

The VIX, however, is receiving new attention and not all of it good. It is largely open to firms of all sizes and presently there is talk about why certain products were even available for purchase by particular investors.

“What troubles me is that oftentimes complex products fall into the hands of people who don’t fully understand them,” said Democratic SEC Commissioner, Kara Stein.

Whilst the commissioner has stated that he isn’t worried about the February’s volatility spike and the immediate fallout, he is more concerned about a review of the market structure that puts these assets into the hands of people who do not understand them.

According to him, the portfolio of assets available to retail investors has changed and needs looking at.

The CFTF has not spoken publicly about the matter.

For a long time, investors had worked with the assumption that the VIX, which measures market volatility, would always be down. This is because market stress was practically non-existent.

On February 5, 2018, however, this changed when Dow Jones Industrial Average had record one-day decline and the VIX went dramatically.

The next day, the VelocityShares Daily Inverse VIX Short-Term ETN was liquidated by Credit Suisse.

This led to a report submitted to the SEC and CTFC about apparent manipulation of the VIX. This came after a study was released in December 2018 by a University of Texas professor and a Ph.D. student which claimed that the VIX settlement process could be rigged.

One of the biggest arguing points for this is that certain assets linked to the VIX have not traded as expected and as a result, the SEC’s enforcement unit is now investigating products linked to the VIX in an attempt to rule out any possible manipulation.