Examining The Evidence On VIX Manipulation

Law360, May 15, 2019

Four Analysis Group authors have published an Expert Analysis on Law360.com, examining the mathematics and hypothetical trading strategies related to the calculation of the settlement price for derivatives based on the VIX, the Chicago Board Options Exchange’s (Cboe’s) volatility index. An ongoing multidistrict litigation (MDL) alleges manipulation of the formula, following on an academic paper suggesting that the value of VIX derivatives could be manipulated on their settlement days through trades in underlying S&P 500 (SPX) options.

In “Examining The Evidence On VIX Manipulation,” Vice Presidents Ran Wei and Edi Grgeta, Associate Ging Cee Ng, and Analyst Brendan Perry analyze ways that trading activity may “move” the settlement price.  A key question in the MDL matter is whether the movement in question was artificially induced, as opposed to reflecting an economically sensible trading or hedging strategy.

As context for the debate over the alleged manipulation of the VIX, the authors provide an overview of the VIX derivatives settlement process and formula. The authors offer a hypothetical example, using data from an actual VIX settlement, to illustrate the effects of trading activity on the settlement price.

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Grgeta E, Ng GC, Perry B, Wei R