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Whistleblower alleges manipulation of Cboe volatility index

NEW YORK (Reuters) – Wall Street ‘s most volatile market volatility is being manipulated, a law firm representing an “anonymous whistleblower” allegedly in a letter to U.S. regulators seen by Reuters on Tuesday. The accusations prompted Cboe Global Markets, the financial exchange operator that is home to the Cboe Volatility Index, to ask Wall Street’s self-funded regulator, the Financial Industry Regulatory Authority (FINRA), to look into the matter, two sources familiar with the situation said. “Cboe has had a role in the trading of certain trading activities for our securities markets, including trading activity that could impact the VIX settlement,” Greg Hoogasian, Chief Regulatory Officer, told Reuters in a statement. The letter to the U.S. Securities and Exchange Commission and the Commodity Futures Trading Commission of Zuckerman Law, Washington-based firm, said it had been held in the investment sector. In addition to the letter, the law firm says it has filed a formal complaint with regulators on behalf of the unidentified client. It was not clear from the letter and a redacted copy of the complaint by Reuters. The complaint says regulators should look at trading data for proof of alleged manipulation. The letter, dated Monday, said that the firms had taken the lead, costing investors nearly $ 2 billion a year. Financial products that seek to track the VIX are at the center of recent stock market turbulence. The VIX estimates the expected near-term volatility by S & P 500 index option prices. The CBOE calculates an official settlement that determines whether broad blocks of future VIX expires worthless or turn a profit. The whistleblower’s letter to the calculation of the VIX index by S & P 500 options, without actually trading. Cboe spokeswoman Suzanne Cosgrove said in a statement, “This letter is replete with inaccurate statements, misconceptions and factual errors, including a fundamental misunderstanding of the relationship between the VIX Index, VIX futures and volatility exchange traded products, among other things.” The SEC and CFTC declined to comment. William Speth, vice president and head of research at Cboe, said, “There are structural safeguards built into the process of calculating VIX settlement value that would hinder the type of manipulation of the letter alleges.” “Our regulatory group is actively monitoring for potential VIX settlement manipulation,” he said. CLAIMS NOT NEW Last year John Griffin and Amin Shams of the McCombs School of Business at the University of Texas, Austin wrote a paper noting significant spikes in trading volume in S & P 500 index options at the exact time of the monthly VIX settlement. The complaint alleging manipulation referenced the paper. ( bit.ly/2HbqSYR ) “It’s exactly what we’re talking about in our paper,” Griffin told Reuters. “I would think the Cboe would want to redesign the settlement process to make it more transparent.” Cboe disagreed with the paper’s conclusions when it was posted on a website for research Cboe ‘s Speth said that the traders would like to quote on SPX options and keep them open for 10 minutes. “And in a world were microseconds count, that’s an eternity,” he said. Stuart John Barton, portfolio manager at Invest In Vol, has a volatility-focused registered investment advisor in Stamford, Connecticut, said, “There is a longstanding understanding that there is a potential for the manipulation of the index level.” Barton said that losses are likely to be much less than $ 2 billion in the letter. The discussion of the volatility of the volatility index is also important when it comes to experimenting with the market. Both Barton and Griffon cautioned that it was unlikely the type of manipulation alleged to be such a large spike in future VIX. “It would be scaremongering to say that it had a big impact on the reason why these products blew up,” Barton said. Reporting Saqib Iqbal Ahmed and John McCrank; Additional reporting by Tevor Hunnicutt in New York, Rama Venkat Raman in Bengaluru and Pete Schroeder in Washington; Editing by Daniel Bases and Lisa Shumaker Our Standards: The Thomson Reuters Trust Principles.

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