In the latest stock market dust-up a lot of people lost a lot of money on the CBOE $VIX and the $XIV. Howard Lindzon wrote about his $XIV experience here. The $XIV was an ETF created by Credit Suisse.
The whistleblower’s claims are consistent with those documented by John Griffin, professor of finance at the University of Texas and Ph.D. candidate Amin Shams in May 2017 in research that says the cost of manipulating less-liquid SPX options would be more than paid for by a successful bet on the direction of the VIX. The paper is consistent with the whistleblower’s conclusion—that manipulators are moving prices of the SPX options by spoofing at settlement—entering quotes for trades that are never executed—to “paint the tape” and, therefore, influence the value of expiring VIX derivatives.
Of course, CBOE vehemently denies the claim. You’d like to believe CBOE. Certainly, contracts that are traded on competing exchanges affect each other. Heck, whole trading strategies are created out of correlations.
Except if you remember….
In 2008 during the depths of the financial crisis, banks colluded to manipulate the price of LIBOR which affects the price of the CME Eurodollar contract. The EU initially denied that banks worked together to artificially hold the price of LIBOR down. It was proven after the fact that they did.
How many medium and smaller banks went bust because of the collusion? How many traders lost money? Any remediation after the fact doesn’t put money back in their accounts and keep them in business.
There have been other scandals over the years by big players. If you traded interest rates in the 80s you might remember the scandal at Solomon. I remember one day before a Treasury auction that moved the short term interest rates huge prior to the auction, and then crashed after the auction. This was an especially violent move. If you had a spread position on it cost you money.
If the private players that create and administer these products don’t oversee and make sure the markets are level, competitive, transparent, and orderly government regulators will enter and make changes.
Usually government regulators are behind the curve. They issue regulations, do investigations and then mete out fines. It’s so unsatisfying.
I think for the most (99.9%) part, capital markets and contracts in them are NOT rigged. But, because I fear people are conditioned to think markets are rigged I am especially sensitive to allegations otherwise. It’s important to me that Americans understand that free market capitalism is the best way to run a society. If they believe markets are rigged and contracts are rigged, we are in danger of losing it.
I’d love to see the nation’s financial journalists dig deeply into this issue with no bias and see if the contract is rigged or not. I’d like to see them dig into other parts of capital markets and find out what’s really going on, if anything. I’d rather see everyone play nice in the sandbox from the get go. That would be a better use of their time than trying to find boogeyman elsewhere.