Cohen Milstein Sellers & Toll PLLC, along with co-counsel Cafferty Clobes Meriwether & Sprengel LLP, have filed a first-of-its-kind lawsuit claiming violations of the Commodity Exchange Act (“CEA”) in connection with suspected manipulation in the markets for futures and options contracts tied to the CBOE Volatility Index (“VIX”). An initial goal of the lawsuit is to uncover the identity of the alleged manipulators by obtaining data from the CBOE exchanges on which the contracts are listed. The lawsuit was filed on March 9, 2018 in the United States District Court for the Northern District of Illinois.

The VIX index is published by the CBOE and is often referred to as the market’s “fear gauge.” It attempts to measure the 30-day implied volatility of the market using the price put and call options on the S&P 500, the core index for U.S. equities. In 2004, the CBOE introduced the first futures for the VIX Index, and in 2006 it introduced the first options on those futures, fueling a dramatic rise in trading volume that continues to this day.

According to the lawsuit, however, the methodology by which the settlement price – and therefore the value – of an expiring VIX future or option is determined, makes the prices of those contracts 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.

Together with co-counsel, the Cohen Milstein team leading the litigation is composed of Michael Eisenkraft, Carol Gilden, and Times Wang.