VIX Plaintiffs Lose Bid to Unmask Traders Tied to 2018 Spike
(Bloomberg) -- A federal judge refused to identify five market makers accused in lawsuits of manipulating the VIX index, one of Wall Street’s most closely watched benchmarks.
The index saw a record spike on Feb. 5, 2018, causing widespread losses among investors who hadn’t anticipated such a sudden increase in market volatility. More than two dozen investors and fund managers sued over the next year, claiming unidentified firms that rigged the index “repeatedly posted and immediately canceled” tens of thousands of quotes for S&P 500 options, whose prices are used to calculate the VIX.
U.S. District Judge Manish S. Shah, during a telephone conference Friday in Chicago, said the plaintiffs had failed to provide enough evidence of actual manipulation to justify revealing the names of the firms, who were identified only by code names in exchange records.
“Plaintiffs have not demonstrated good cause” for the disclosure, said Shah, who gave them until Aug. 3 to determine whether the legal claims will proceed.
The judge had earlier authorized the release of exchange data to help the plaintiffs make their case. LJM Partners Ltd. and Two Roads Shared Trust said they used the information to identify the code names of “five market makers responsible for the manipulative SPX Option quoting.”
But Shah said the behavior now alleged by the plaintiffs was “narrower” and doesn’t match the allegations made in the original complaint. He said he hadn’t authorized the data disclosure to allow the plaintiffs to identify new claims.
The VIX is a barometer of fear used to guide investment decisions throughout the $50 trillion U.S. stock market. There are also billions of dollars invested in funds, futures or options that directly track its movements.
The funds claim unidentified market participants manipulated the VIX by posting S&P 500 options quotes that only stayed in the order book for milliseconds, not long enough for anyone to trade against but enough time for them to be incorporated into the value of the VIX.
That technique, known as “flashing,” was unrelated to any legitimate positions the unidentified market participants held or wished to hold, but successfully manipulated the price of S&P 500 options and futures contracts, according to LJM, a Chicago investment management fund that lost $446.8 million in one day from the market moves, wiping out 86.5% of its assets.
Cboe Global Markets Inc., the Chicago-based owner of the VIX and the exchange where S&P 500 options trade, has repeatedly dismissed claims of manipulation of the index. The Cboe intervened in the lawsuit and fought the request to identify the firms. In a court filing, the company said that of the 87,000 allegedly bogus quotes, only 22 were actually used in the VIX calculation and had “no material effect” on the values.
Someone to Blame
Unidentified market participants opposed the request for unmasking, saying in court filings that the funds and investors had failed to show actual manipulation even after being given access to market data to help prove their case. They said the lawsuits were just looking for someone to blame.
“Rather than specific allegations of manipulation, plaintiffs’ complaints offer a menu of what they characterize as potentially manipulative conduct that may have occurred on February 5 and 6, 2018,” the market participants said in a court filing.
The cases are Two Roads Shared Trust v. Does, 20-cv-831, and LJM Partners v. Does, 19-cv-368, in the Northern District of Illinois (Chicago).
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