Cboe Working to Improve VIX Settlement Process After Wild Swing

(Bloomberg) -- Cboe Global Markets Inc. said it is looking at ways to improve the settlement process for its Cboe Volatility Index, whose swings before expiration have been looked upon with suspicion in the market.

Allegations of manipulation are “without merit,” the Chicago-based exchange operator said in a letter to customers and traders that was included in a filing Monday. “If our regulatory efforts were to uncover any manipulation, it would be rooted out, swiftly and decisively.”

Last week, claims that the VIX is sometimes rigged were revived when the index swung just as derivatives on it were expiring. The concern is that traders may try to push the market around to make their positions pay off at settlement time. The VIX, which derives its price from S&P 500 options, is a closely watched market barometer.

A buy-order imbalance of 114,000 SPX options affected the final VIX settlement value on April 18, the Chicago-based exchange operator said. The auction process went the way it was supposed to, “notwithstanding that the final settlement value was higher than what market participants may have otherwise expected,” Cboe said.

“We are assessing steps that Cboe can take to enhance the VIX settlement process and attract more liquidity to our settlement auction,” the company said in the letter signed by Chairman and Chief Executive Officer Ed Tilly and Chris Concannon, president and chief operating officer.

VIX Allegations

Allegations about the VIX’s vulnerability to manipulation aren’t generally taken seriously by market professionals. Still, University of Texas researchers published a study last year that claimed to find evidence the process had been gamed, possibly by people holding derivatives.

“We reiterate that we believe these claims are without merit, and that the academic paper’s analysis and conclusions are based upon a fundamental misunderstanding about how VIX derivatives are traded and settled,” Cboe said in the letter. “The trading behavior the author considered suspicious is consistent with normal and legitimate trading behavior.”

In February, an anonymous whistle-blower alleged to federal authorities in a letter that the VIX was somehow being manipulated. Cboe blasted the letter, stating that it was full of mistakes and misconceptions and its conclusions weren’t credible.

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