VIX Jumped in Flat Market After Futures Settled Way Above Range

(Bloomberg) -- The Cboe Volatility Index, a barometer for investor anxiety, jumped Wednesday amid a tranquil stock market, reprising a pattern of jerky moves on days when futures on the gauge are settled in monthly auctions.

The VIX was heading for its longest streak of daily losses in almost a year in early New York trading, before it reversed direction and rose as much as 11 percent. The gain occurred around the time of the settlement, which happened 13 percent above the VIX close on Tuesday and outside of today’s range.

The higher settlement came as hedge funds have increased their bets for turbulence in the equity market in the past four weeks. Large speculators hold record net-long VIX futures positions, according to the latest data from the Commodity Futures Trading Commission.

VIX futures settle on Wednesdays at 9:20 a.m. New York time in an auction by the Cboe Global Markets Inc. Some market watchers have speculated that the gauge could be gamed and that the settlement process is subject to manipulation.

People are divided on the precise relationship of the auction and the VIX’s level. The process reflects particularly robust price discovery -- it reflects tens of thousands of trades in S&P 500 Index options -- and it’s natural settlement would sometimes occur at a distance from the VIX itself. On the other hand, at least one academic study has presented evidence of fishy trading in the auction, potentially by entities with positions in futures.

To contact the reporters on this story: Lu Wang in New York at lwang8@bloomberg.net, Cecile Vannucci in London at cvannucci1@bloomberg.net.

To contact the editors responsible for this story: Chris Nagi at chrisnagi@bloomberg.net, Joanna Ossinger

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