Investors are losing hundreds of millions of dollars a month due to the risk the VIX bears to the entire equity market. It’s believed to be a scheme to employ fear onto Wall Street. An “anonymous whistleblower” tipped off the U.S. financial regulators and suggested that they investigate the VIX before more damage is done.
If you are unfamiliar, the cost of buying options is measure by something called the CBOE volatility index or the VIX, also known as Wall Street’s “fear gauge”. It is the most commonly accepted barometer of anticipated near-term stock market volatility.
A letter said, “The flaw allows trading firms with advanced 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”.
The volatility of the stocks was demonstrated in the previous week, as the S&P 500 and Dow Jones Industrial Average endured their largest respective percentage drops since 2011.
Investors that used exchange-traded products that were connected to the VIX were crushed. Credit Suisse Group and Nomura Co Ltd also claimed that they would abolish two exchange traded notes that gambled on low volatility of stock prices.
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ETPs have drawn the attention of about $3 billion in investment. This is due to the several months of calm in the market, and this has caused selling volatility a profitable matter.
As the VIX predicted price increases, these ETPs decrease in their value. As a result the issuers of these products have the ability to cash out their shares.
In the “anonymous whistleblower” letter it said, “We contend that the liquidation of the VIX ETPs last week was not due solely to flaws in the design of these products, but instead was driven largely by a rampant manipulation of the VIX index. We contend that the liquidation of the VIX ETPs last week was not due solely to flaws in the design of these products, but instead was driven largely by a rampant manipulation of the VIX index”.
The SEC has decided to not make a comment. The CFTC and CBOE are not currently available for comments.