The biggest index used by Wall Street to gauge stock market volatility, known as the Cboe Volatility Index or VIX, is being manipulated, causing wild market swings and costing investors hundreds of millions of dollars a month, an anonymous whistleblower has warned the Securities and Exchange Commission (SEC).
The whistleblower, a senior executive who worked at many of the largest investment firms in the world, made the allegations in a letter to the SEC and the Commodity Futures Trading Commission (CFTC) sent by a Washington D.C. law firm.
According to USA Today, the whistleblower alleges that the market manipulators are “taking advantage of a ‘pervasive flaw’ in options exchange trading at Cboe Global Markets in Chicago. The flaw ‘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.'”
The whistleblower claims that the recent stock market volatility with its drastic ups and downs stemmed from the manipulation scheme. The whistleblower said the recent market activity “confirms the fraud and exposes the systemic risk to the entire equity market,” USA Today reported.
The VIX, which is derived from S&P 500 index option prices, estimates the expected 30-day market volatility. It is used increasingly by investors to make bets on the future behavior of the market.
According to Reuters, each month the Cboe calculates an official settlement to determine “whether large blocks of VIX futures expire worthless or turn a profit.
“The whistleblower’s letter alleges a flaw in the calculation of the VIX that allows trading firms to manipulate the VIX index by posting quotes for S&P 500 options, without actually trading,” Reuters reported.
The SEC declined to comment on the whistleblower’s accusations, but CFTC spokeswoman Erica Richardson told USA Today that “Complaints from whistleblowers are an integral part of the CFTC’s enforcement program … The Commission takes whistleblower complaints very seriously and therefore does not confirm or deny the existence of complaints, nor do we publicly comment on matters related to complaints.”