Market Manipulation in the VIX. Are Illiquid Options Regularly Used to Manipulate the Cash Settlement?

This book investigates market manipulation in the volatility index VIX. The VIX is known as fear-gauge of the US stock market and its derivatives are an established hedge against negative market sentiment. Characteristically, the VIX is an index whose value is computed by a special formula based on relatively illiquid S&P 500 options. In contrast, derivatives on the VIX are heavily traded and are settled in cash once a month based on option prices determined in an auction. This short time frame makes the VIX vulnerable as manipulators can move the underlying option prices to an abnormal price level on purpose to receive an artificially high cash settlement. This book explores approaches to make the effects of manipulation measurable. For this purpose, four measures are deduced. The measures are based on the index fluctuation range, its intraday deviations from the opening value, the put/call ratio of the underlying options and their trading volume. The empirical results reveal strong indications of manipulation. The analysis is concluded by a discussion of alternative explanations of the results observed and a sketch on how to impede manipulation or change the VIX structure.