VIX Takes Another Ride, This Time With a Lot Less Complaining

(Bloomberg) -- It won’t quiet every critical voice. But even as the VIX took another swing just as futures tracking it expired Wednesday, steps taken by overseers to squelch anomalies from past settlements showed signs of working.

The result, at least for a day, was a muzzling in the familiar refrain of outcry over possible manipulation.

It looked dicey at first. As in the past, an auction used to set a monthly value critical to holders of billions of dollars in VIX derivatives coincided with a noticeable lurch in the VIX itself -- a spectacle that reliably draws criticism.

But as things settled down, evidence started to mount that Wednesday’s events were at worst noise and arguably evidence Cboe Global Markets Inc. had succeeded at restoring a measure of order to one of its flagship products.

“We are very pleased with the performance of today’s settlement auction,” Cboe President Chris Concannon said in an interview. “We were comfortable with the way liquidity supported the settlement auction process.”

Among other things, the sudden drop in the price of the VIX occurred simultaneously with a jump in S&P 500 futures -- the normal state of affairs between the two markets. And the auction used to set the monthly settlement price appeared to be a particularly clean one, without the imbalance between requests to buy and sell that marred last month’s episode.

Does it prove allegations of misconduct in the VIX settlement never had any merit? No. Federal investigators are looking into the benchmark, with one focus being the monthly auction. But a market sleuth looking for rigging in Wednesday’s events would have a difficult time making the case.

“I don’t think today’s print is necessarily a good day for corroborating such claims,” said Anand Omprakash, an equity derivatives strategist at BNP Paribas in New York.

Monthly settlements for futures on the VIX, a gauge of investor anxiety derived from S&P 500 options prices, have become ground zero for allegations traders are pushing the index around to get better prices on futures. Speculation something fishy is happening got deafening in April when the VIX settled 13 percent away from prices that had prevailed in the market minutes earlier.

While Cboe has steadfastly denied such claims, it conceded in a letter to members last month that it could do more to promote liquidity in the process used in the settlement. For this month’s auction, Cboe overhauled how the process works, tearing down barriers that had previously kept some traders out.

In an era of computer trading, VIX settlements before today had been a throwback to bygone years. Humans in downtown Chicago trading pits drove the process. This time, market makers could submit quotes completely electronically to the auction -- and 10 did, according to the exchange.

The result: a shift in how the auction went. During the last settlement a month ago, there was an enormous imbalance, with requests to buy options outnumbering requests to sell by 114,000 contracts. As traders stepped in to fill that gap, they jacked up prices to take on that risk -- which was evidence to some that the process was being gamed.

This time, there was only a minimal imbalance, according to a person familiar with the matter, a sign of a deeper order book.

May futures contracts on the VIX settled at a level of 13.79 on Wednesday. That’s 5.7 percent below the level the index closed at on Tuesday. But, in a sign that the settlement price stayed tethered to the market, the VIX remained fairly close to 13.79 in the hours following the auction.

“The VIX has been hovering in the high 13s for much of the morning, in line with today’s settlement. The level of the VIX spot this morning, not VIX spot yesterday, is probably more reflective of where the settlement should have been this morning,” said BNP’s Omprakash.

The auction -- which involves trading S&P 500 options that trade at Cboe -- runs from 9:20 a.m. to 9:30 a.m. New York time. So what’s to be made of the big plunge in the VIX 20 minutes before that -- something skeptics view as evidence a manipulator is moving the index to levels favorable to their illicit strategy? There is an innocuous explanation: a far bigger market, CME Group Inc.’s S&P 500 futures contracts, zoomed higher at the same time, pushing the VIX down. The VIX and S&P 500 futures are strongly correlated, though they tend to move in opposite directions.

©2018 Bloomberg L.P.

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