CHICAGO (CN) – Investors claim in a federal class action that the Chicago Board of Options Exchange put profits ahead of protecting investors by allegedly allowing its Volatility Index to be manipulated by Wall Street firms.
In February, an anonymous whistleblower sent a letter to U.S. regulators claiming that large trading firms are manipulating the Chicago Board of Exchange’s Volatility Index (VIX), Wall Street’s most widely followed gauge of future stock market volatility.
The letter says that a flaw in the calculation of the VIX allows trading firms to manipulate the volatility index by posting quotes for S&P 500 options without actually trading.
The whistleblower further claimed that such manipulation was at least partially responsible for the stock market’s 10 percent plunge in February.
The Financial Industry Regulatory Authority and Securities and Exchange Commission have opened investigations based on the allegations, but the agencies have since made no announcement about their findings.
Taking matters into his own hands, lead plaintiff John Pels filed a federal class action against CBOE Global Markets, CBOE Exchange, CBOE Futures Exchange, and unnamed John Doe trading firms.
“There is abundant evidence that the John Doe defendants have colluded to manipulate VIX and, in doing so, have reaped hundreds of millions (if not billions) of ill-gotten profits due to their holdings of derivatives linked to VIX,” the complaint states “Among other things, the settlement value of VIX frequently substantially deviates (by as much as 10 percent) from the value of VIX that is calculated just seconds later. Manipulation is the only rational explanation for these instantaneous jumps in the value of VIX right at the moment of settlement.”
Pels accuses the CBOE of being aware of the manipulation while allegedly turning a blind eye because it is a major profit generator, earning hundreds of millions of dollars a year for the Board.
“Instead, the CBOE Defendants put the reputation of VIX – and the profits they earn from VIX – ahead of protecting investors,” Pels says.
The class is represented by Richard Prendergast in Chicago, and David Frederick with Kellogg Hansen in Washington D.C.