March 13, 2018

Wall Street's so-called fear gauge was "manipulated," a new federal class action lawsuit alleges.

The CBOE Volatility Index (VIX), known as the VIX, has been hotly debated since the stock market plunged last month. The VIX is a real-time predictor of how much the S&P 500 will fluctuate over the 30 days that follow.

Betting on market calm had paid off for investors as stocks went on a tear in 2017, but it backfired last month when volatility seized Wall Street.

The Dow tanked 1,175 points on February 5, sending the VIX skyrocketing a record 116% that day. Inverse volatility funds, which trade opposite to the VIX, fell dramatically. Some market analysts argued those bad bets drove the VIX higher and stocks lower than they otherwise would have been.

A lawsuit filed on Friday claims traders manipulated the value of VIX options and futures by making bets on the S&P before VIX settlement auctions. The unidentified plaintiffs want to subpoena the Chicago Board Options Exchange, which it says can identify traders and bets that contributed to "hundreds of millions of dollars in losses for investors across the country."

"By manipulating the VIX derivative market, the defendants not only profited off their deceit at the expense of honest investors, but damaged the integrity of an entire industry," said Michael Eisenkraft, co-counsel for the plaintiff and partner in Cohen Milstein's Securities Litigation and Investor Protection practice.

The full article can be read here