according to the lawsuit, the unique and complex way in which the settlement price – and therefore the value – of an expiring VIX future or option is determined has left the market extremely susceptible to manipulation. The complaint cites research from University of Texas academics which points out that, unlike other index derivatives which derive their value from the price of their underlying assets, VIX futures and options are subject to a hybrid auctioning process on expiration date that is largely affected by another class of instruments, namely SPX options. The unique structure, according to the researchers, leaves the market much more vulnerable to manipulation, as traders can influence the final settlement price of VIX derivatives by making transactions that distort the value of relatively thinly traded SPX options.
The lawsuit alleges the manipulation scheme identified by the UT researches was put into effect no later than 2011. It also cites recent settlement prices reportedly showing abnormal spikes in VIX future and options prices, including one session in January 2018 in which the settlement price jumped from $11.76 to $12.81 in the final day of trading before expiration, marking the fourth largest price swing over more than 160 days of trading. According to the lawsuit, this market manipulation led to the transfer of more than $42 million among contract holders.
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