Labaton Investigates Manipulation of the Chicago Board Options Exchange Volatility Index

NEW YORK (June 14, 2018) - Labaton Sucharow has an ongoing investigation into the manipulation of the Chicago Board Options Exchange (“CBOE”)’s Volatility Index, and its related derivative financial products (“VIX derivatives”). Labaton Sucharow recently filed a class action on behalf of VIX derivatives holders, naming the CBOE and its futures exchange subsidiary, CBOE Futures Exchange, as defendants for permitting rampant manipulation of the VIX over a several year period by as-yet-to-be-identified market participants.[1]

In this Investor Alert, we provide: (1) an overview of the VIX manipulation allegations, (2) the VIX derivatives potentially adversely impacted by the manipulation, and (3) Labaton Sucharow’s experience in litigating similar market manipulation actions on behalf of injured investors.

If you would like Labaton Sucharow to provide a preliminary assessment of your exposure to the VIX manipulation, please provide us, in electronic form, all VIX futures and options transactions you entered into between January 1, 2006 and the present.

VIX Manipulation Overview

The VIX is a widely-tracked financial index that measures the 30-day implied volatility of the stock (equity) market. The index is commonly referred to as Wall Street’s “fear gauge” because it typically rises and falls on investors’ concerns about stock market drops. The VIX is intended to serve as a benchmark of expected short-term market volatility and to provide an index upon which futures and options contracts on volatility could be written, and it is calculated using a formula linked to S&P 500 index option (“SPX Options”) prices.

Leading financial experts have long recognized the benefits of trading in volatility, which helps to explain the popularity of the VIX and its impact on the larger financial market. The CBOE originally launched trading of VIX futures contracts in May 2004 and VIX option contracts in February 2006, and since then, volatility trading—and the instruments relying on such trading—have increased dramatically. Indeed, the total daily trading volume of VIX futures and options is over 1,000,000 contracts per day.

Recent studies and reports have strongly suggested that there has been rampant, long-term manipulation of the VIX. Manipulation can occur in at least two ways. To inflate the VIX, manipulators can submit aggressive bids on far out-of-the-money (“OTM”) put SPX Options during the special settlement procedure (known as the “SOQ”) for VIX futures and options. Inflating the VIX at VIX futures and options settlement dates would benefit existing long positions in VIX futures and options (buyers of calls or sellers of puts). Conversely, to suppress the VIX, manipulators can submit lower offers on OTM SPX Options during the SOQ. Suppressing the VIX at futures and options settlement dates would benefit those holding short positions in VIX futures and options (buyers of puts or sellers of calls).

Evidence of the VIX’s susceptibility to manipulation abounds. For example, a confidential whistleblower with high-level executive experience in the industry alerted the Securities and Exchange Commission (“SEC”) and Commodity Futures Trading Commission (“CFTC”) to manipulation in the VIX market. The whistleblower, relying on decades of experience at large trading firms, stated that there is a “market manipulation scheme that takes advantage of a pervasive flaw” in the VIX, allowing “trading firms with sophisticated algorithms to move the VIX up or down by simply posting quotes on S&P options and without needing to physically engage in any trading or deploying any capital.”

Further, a recent empirical study published by a University of Texas professor found that “not only is it feasible to influence the VIX settlement, but also . . . price and volume patterns at settlement [are] consistent with what one would expect from such strategic trading.”[2] The study concluded that the effects of this manipulation on VIX futures and options have been disastrous, with total costs to investors exceeding $1.8 billion. Labaton Sucharow retained its own experts, who have confirmed and extended the findings of this study. Specifically, our experts found that there were significant deviations from expected values in the VIX at contract settlement dates for VIX futures and VIX options.

Allegations of VIX manipulation have stirred regulators into action. The Financial Industry Regulatory Authority (“FINRA”), SEC and CFTC, have each launched an investigations into the VIX.

VIX Derivatives Affected by Manipulation

The VIX manipulation affected an array of VIX derivatives, but the effects may be most acute for VIX futures and VIX options. Specifically, the following types of VIX futures and options were potentially affected.

  • Futures
    • VIX weekly futures
    • VIX monthly futures
  • Options
    • VIX weekly options
    • VIX monthly options

As stated above, injury to these derivatives has exceeded $1 billion, but a full accounting may yield even greater estimates.

Labaton Sucharow’s Significant Experience Prosecuting Cases of This Nature

Labaton Sucharow brings the sophisticated resources of a top-tier firm, and has secured exceptional results for its clients. The Firm’s experienced trial counsel understand how to maximize recoveries, as well as how to effectively address issues concerning confidentiality, publicity, and discovery. Labaton Sucharow is particularly well situated to prosecute antitrust, CEA, or Exchange Act claims against the defendants because the Firm can draw upon its long experience prosecuting misconduct in financial markets involving manipulation and fraud. As just a sampling, the Firm has played a leading role in the following recent financial benchmark rigging cases:

  • In re Treasury Securities Auction Antitrust Litig., No. 15-md-2673 (S.D.N.Y.): The firm serves as co-lead counsel in a class action alleging a price-fixing conspiracy and unlawful boycott involving U.S. Treasury securities.
  • In re Foreign Exchange Benchmark Rates Antitrust Litig., No. 13-cv-07789 (S.D.N.Y.): The firm serves as class and allocation counsel in an action alleging banks manipulated prices of FX transactions ($2.3B in partial settlements to date).
  • Alaska Electrical Pension Fund v. Bank of America, Corp., No. 14-cv-7126 (S.D.N.Y.): The firm serves as class counsel in an action alleging banks manipulated a key interest rate derivatives benchmark ($408.5 million in partial settlements to date).
  • In re Platinum and Palladium Antitrust Litig., No. 14-cv-09391 (S.D.N.Y.): The firm serves as co-lead counsel in a case alleging that dealers conspired to fix the prices of these precious metals and financial products derived from them

[1] See Huang v. Chicago Board Options Exchange, Inc., No. 18-cv-2460 (N.D. Ill., filed Apr. 5, 2018). Because the CBOE has not disclosed the trading data that would allow for the identification of the trading firms who manipulated the VIX, we intend to seek discovery from the CBOE in order to name additional defendants.

[2] John M. Griffin & Amin Shams, Manipulation in the VIX? at 37 (May 23, 2017) (the “Griffin Study”), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2972979, at 36.


How Labaton Can Help

If you would like Labaton Sucharow to provide a preliminary assessment of your exposure to the VIX manipulation, please provide us, in electronic form, all VIX futures and options transactions you entered into between January 1, 2006 and the present. Please contact the following attorneys for more information:

Gregory S. Asciolla
(212) 907-0827
gasciolla@labaton.com

Christopher J. McDonald
(212) 907-0861
cmcdonald@labaton.com