A U.S. regulator is looking into whether prices linked to the stock market’s widely watched “fear index” have been manipulated, according to people with knowledge of the matter.
The Cboe Volatility Index, known as the VIX, is derived from S&P 500 options prices. The Financial Industry Regulatory Authority is scrutinizing whether traders placed bets on S&P 500 options to influence prices for VIX futures, the people said.
Separately, a letter from a law firm Monday representing an unidentified client urged U.S. regulators to investigate VIX manipulation, claiming it has cost investors hundreds of millions of dollars in losses each month.
If evidence of manipulation is found, it would be a black mark for the VIX, which has soared in popularity over the last decade as a hedging tool for investors. The VIX is designed to track investor anxiety and tends to move in the opposite direction of the benchmark S&P 500 index. Investors purchase VIX futures and options to protect against declines in stocks.
Finra is Wall Street’s self-regulator. It isn’t a government entity but is overseen by the Securities and Exchange Commission. It provides oversight to Wall Street firms such as brokerages and exchanges. Finra works with Cboe Global Markets to help with surveillance of its market.
It is unclear whether Finra’s activities on the VIX amount to a formal investigation by the organization. Finra could also reach the conclusion that prices for VIX futures haven’t been manipulated.
A probe by Finra or another U.S. regulator would be another setback for Cboe Global Markets Inc. The VIX is Cboe’s marquee franchise, with a slew of products including futures, options and exchange-traded products that track it.
Last week, the resurgence of market volatility triggered a spike in the VIX and the collapse of a widely traded ETP that buys and sells VIX futures. The ETP’s demise helped send Cboe’s shares sliding 18% over the next four days amid speculation that losses like those suffered by the ETP’s investors could lead to greater regulatory scrutiny for the VIX going forward.