Another Rigged Market: Scientific Study Finds Systemic VIX Auction Manipulation

Tyler Durden's picture

To the list of 'rigged' markets (e.g. Libor, FX, Silver, Treasuries...) we can now add VIX (which explains a lot) as two University of Texas at Austin finance professors find "large transient deviations in VIX prices" around the morning auction, "consistent with market manipulation."

As Bloomberg reports, in addition to being an index that is much quoted in articles about market complacency, the VIX is used as a reference price for derivatives: If you want to bet that stock-market volatility will go up, or down, you can buy or sell futures or options on the VIX. These products are cash settled: The VIX is not a thing you can own, so if your option ends up in the money you just get paid cash for the value of the VIX at settlement.  

CBOE gets an official settlement level of the VIX based on a special monthly settlement auction of S&P 500 options. The auction runs from 7:30 a.m to 8:30 a.m., Chicago time. Traders submit bids and offers for S&P 500 options, the auction matches buyers and sellers to find clearing prices, and the prices of those S&P 500 options are used to compute the official settlement level of the VIX.

Guess what?

At the settlement time of the VIX Volatility Index, volume spikes on S&P 500 Index (SPX) options, but only in out-of-the-money options that are used to calculate the VIX, and more so for options with a higher and discontinuous influence on VIX.


We investigate alternative explanations of hedging and coordinated liquidity trading. Tests including those utilizing differences in put and call options, open interest around the settlement, and a similar volatility contract with an entirely different settlement procedure in Europe are inconsistent with these explanations but consistent with market manipulation.

That's from this paper by John Griffin and Amin Shams of the University of Texas, who find a lot of trading in the S&P 500 options underlying the VIX during these settlement auctions, trading that pushes the settlement price of the VIX up or down. So for instance in months where the trading pushes the VIX up, the prevailing price of the VIX-influencing options will jump during the auction, peak at around 8:15 a.m. (the deadline for VIX-related bids in the auction), and then drop seconds after the auction ends when the options start trading normally:

The blue line there is a measure of the indicative prices of VIX-influencing options, spiking at 8:00 a.m. and peaking near 8:15. (If you ignore the numbers on the axis, you can almost think of it as being a chart of the VIX price.) The red dot is the trading price of those options about 25 seconds after the auction finishes.

The average effect is something like 0.31 VIX points, sometimes up and sometimes down, depending on the month.

 What is going on? Usually when you see patterns like this, the innocent explanation is hedging. But Griffin and Shams consider and reject that notion here, noting for instance that traders don't seem to be closing out existing hedge positions but instead adding new ones. They argue that it's more likely to be explained by attempts to move the VIX: If you are a dealer who is long (short) VIX futures, you can push up (down) the VIX at settlement by buying (selling) some deep-out-of-the-money S&P 500 options.

That is generically true in any derivatives market: If you are long a derivative, you can buy the underlying and push up the derivative price. But Griffin and Shams give a list of reasons why you'd almost expect the VIX to be manipulated:

First, the upper-level VIX market is large and liquid, enabling a trader to invest a sizeable position in VIX derivatives. In contrast, many of the lower-level SPX options, where the VIX values are derived from, are illiquid.

Griffin and Shams calculate that "the size of VIX futures with open interest at settlement is on average 5.7 times the size SPX options traded at settlement, and it is 7.3 times for VIX options that are in-the-money at settlement."

So if you are a trader who owns a lot of the market in VIX futures, you could push around a large dollar value of futures by trading a small dollar value in options. This is particularly true because the S&P option volume is divided among many strikes, and the illiquid deep out-of-the-money S&P 500 options have a big influence on the VIX: You can move the price of those options a lot with relatively small trades, and those price changes have a disproportionate effect on the VIX.

Second, the VIX derivatives are cash settled. Therefore, if the VIX settlement value deviates from its true value, the VIX position will automatically be cashed out at the deviated price.

If cattle are trading at the wrong price when your cattle futures settle, that doesn't matter so much, because you just get the cattle. But you can't just get the VIX: You get cash, so if the VIX is at the wrong price at settlement, that's the price you get.

Third, the settlement occurs within a short period of time based on the SPX options pre-open auction.

You don't have to intervene over some long period to keep options prices up; you can just submit bids in the pre-opening auction once a month and move the settlement price for that month.

There is a sort of hierarchy of manipulability in markets. At the top is Libor manipulation: Trillions of dollars of derivatives settled based on Libor, but Libor was calculated by essentially asking banks "what should Libor be?" The banks didn't even have to do any trading in order to push the number around; manipulation was, in effect, costless. (Later, with the fines, it was costly.)

At the bottom is, like, manipulating the price of a stock by trading that stock. There are cases of it! It's a thing. But it is a dumb thing; it really shouldn't work. If you buy a stock, you will push the price up, sure. But to make any money you then have to sell the stock, which should push the price right back down.

But if you are going to manipulate a tradable market -- as opposed to a made-up one like Libor -- then VIX looks pretty tempting.

The product that you trade (S&P 500 options) is different from the product where you make your money (VIX futures and options), and the trading market is in the relevant sense smaller than the derivative market: You can move a lot of value in VIX products by trading a small amount of value, in a confined period of time, in the underlying market. So you can cheerfully lose money executing the manipulation -- trading the S&P options -- and make back more in the derivative.

If Griffin and Shams are right that there's manipulation, there's no particular pattern to it: Sometimes VIX gets anomalously pushed up during the settlement, sometimes down. That's consistent with, for instance, a story of big dealers adding up their positions before each monthly settlement, realizing that they're net long (short), and trying to push VIX up (down) to help out their positions. It would be like the kind of Libor manipulation that banks did to help out their trading books (which was up or down depending on their positions) -- not the kind of Libor manipulation that banks also did to disguise their funding costs (which moved Libor systematically down).

Finally, The Wall Street Journal notes that it is, of course, tough to rule out the possibility that something more benign is going on. For example, investors who had used the expiring derivatives to protect themselves could be seeking replacement protection when they participate in the auction, some say. Messrs. Griffin and Shams believe it’s not hedging activity due to the trading patterns they observed.

Full Study below:

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
spastic_colon's picture

good stuff......and glad a study finally confirmed the "duh" conclusion.


"So if you are a trader who owns a lot of the market in VIX futures, you could push around a large dollar value of futures by trading a small dollar value in options"........gee who could this be??

BullyBearish's picture

someone needs to be FOADed...

Harlequin001's picture

It's ok, don't worry, the SEC will never find it...

It's not their job.

HillaryOdor's picture

I for one am shocked.  I don't know about you guys.

remain calm's picture


robertsgt40's picture

If you ain't cheatin you ain't tryin. 

Is-Be's picture


That's my model.

Donnella Meadows (of the Club of Rome) wrote in her book "Thinking in Systems" that in order for an output to be well controlled (flat) the (negative) feedback loop has to be 

A) Powerful and 

B) Fast

That describes the Algos.

And why every curve looks well controlled.

shizzledizzle's picture

Hope UT Austin professors don't go out drinking late... Papers like this increase the likelyhood of an acident exponentailly.

HRClinton's picture

Certain topics are Verboten in the MSM.

E.g.: Saudi human rights for women and LGBT, Pizzagate, Pedogate, Seth Rich murder, Plunge Protection Team (PTT), and PM price manipulation.

Even FOX is learning this the hard way, by having the DNC or Deep State going after ad sponsors for specific pro-Trump personalities (O'Reilly, Hannity).

yogibear's picture

VIX going to zero indicates some entity with billions is taking risk out. Who might that be? Calling William Dudley and Janet Yellen.


HRClinton's picture

"The PTT is not involved in VIX manipulation or stock market propping. It's all conspiracy stuff".

Insurrexion's picture

WE DEMAND a Class action lawsuit against VelocityShares Daily 2x VIX Short Term ETN (TVIX) and the ProShares Ultra VIX Short-Term Futures (UVXY).

mily's picture

And they just dicovered it? This guy wrote about this approach in 2011

shizzledizzle's picture

Rember reading that some time ago and his retraction. He states....

"So e.g. in the case of  some really low put strike, if you submit a nickel bid at the pre-open, it will get filled, but if the resulting opening quote has zero bid that strike will be ignored in the VIX settlement calculation."

To me all that says is it cost 10 cents rather than 5. Is it absurd to assume that someone with bottemless pockets could be on BOTH sides of the trade?
syzygysus's picture

<- Whistleblower goes to jail

<- No one goes to jail

GodHelpAmerica's picture

Taking lessons from China, or China taking lessons from the US?

But the US has "free markets"...

And I have a bridge to sell you...

Zepper's picture






Overleveraged_and_Impatient's picture

Hey theres only one thing I know. I'm up about $38,000 on the year by going 3x Leveraged Long S&P 500. Today was an amazing day, and it's not even over!

spastic_colon's picture

like you didnt pee your pants last week.........

Squid Viscous's picture

wow, you're a heavy hitter.

thanks for sharing

silverserfer's picture

so basicaly trading vix is like a straight guy walking into a gay orgy trying to fuck some chick thats not there but ends up gettng fucked himself. Sounds awsome!

scoutshonor's picture

Could be more innocent than that.  Once I was on a bike ride and got thirsty and stopped for a beer at a gay bar in the Castro.  I made the mistake of leaving my beer unattended while I went to the loo.

I woke up the next morning face down in the parking lot and my ass was killing me.  I imagine that several of us went on a long bike ride through San Francisco--but don't remember cuz roofie.

Weird that we ended up right where we started.

shizzledizzle's picture

And it all originates from the NY Fed desk.

michigan independant's picture

Warning Fiat is not Gold and settled in a Script Fiat report backed by gun powder. Odd thing since 1913.

Confucious 222's picture

Sooooo, Griffen and Shams:

Who runs Hymietown???

Consuelo's picture



Bah...  So 2015 ago...

BlueHorseShoeLovesDT's picture

No shit Sherlock!


You blinded me with science.

Consuelo's picture



Yeah but...   Whose trading desk...?

Madcow's picture

Anyone caught not manipulating markets (eg stealing money from other people by cheating) will be considered a sexist and raped in prison.

BlueHorseShoeLovesDT's picture

Donald Trump

"Now we have to go up, up, up".


January 26, 2017


Munchkin, Cohn make it happen or you're fired!

Put Blankfein on it. He's a sneaky little shit just like you. 


Nomad Trader's picture

It's not manipulation, it's trading. If there was no buyers to match those extra 'manipulation' sell orders, then it simply means the bulls were weak. That's not good or bad. It just is.

EHM's picture

Silly rabbit Vix are for criminals

pebblewriter's picture

This study probably assumes the participants are rational investors -- not those who have (1) access to unlimited funds, (2) at no cost, and (3) no need to turn a profit.  In other words...central banks.  

The easy way to get to the bottom of it would be to pull the trade records of all the VIX shorting going on election night WHILE stock futures were still in the midst of plummeting.

But, it would be a little embarrassing if yet another conspiracy theory became conspiracy fact.