Securities Regulation Daily New lawsuit alleges CBOE allows price manipulation of VIX-linked products
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Wednesday, March 21, 2018

New lawsuit alleges CBOE allows price manipulation of VIX-linked products

By Lene Powell, J.D.

According to a newly filed lawsuit in the Northern District of Illinois, the CBOE and CFE options and futures exchanges are enabling price manipulation of VIX-linked products by certain unnamed financial institutions and trading firms to benefit the exchanges’ own bottom line. The suit joins several previously filed actions alleging VIX-related coordinated manipulation by traders, but shifts the focus to the exchanges’ alleged role in making the manipulation possible. The suit asserts antitrust and manipulation violations of the Sherman Act and Commodity Exchange Act (Tomasulo v. CBOE Exchange, Inc., March 20, 2018).

Alleged manipulation of VIX-linked products. Also called the "Fear Index," the Volatility Index or "VIX" is a benchmark index based on S&P 500 options that reflects expected market volatility in the near term. The VIX is calculated by CBOE Exchange, a subsidiary of Chicago Global Markets, which also operates the CBOE Futures Exchange (CFE).The VIX itself is a benchmark that cannot be traded directly, but the exchanges offer various futures, options, and exchange-traded products tied to the VIX.

The lawsuit alleges that certain unnamed financial institutions and trading firms have engaged in concerted action to manipulate the settlement values of VIX-linked products to benefit their own positions, in violation of the Sherman Act and Commodity Exchange Act. Specifically, the suit alleges that using sophisticated technology and/or their CBOE-authorized market-making role, certain market participants have deployed capital in a concerted way during the short settlement window to influence the settlement price and thereby manipulate the price of their holdings.

CBOE’s alleged enabling role. The suit further argues that CBOE itself has played an enabling role in this alleged manipulation, and "profits handsomely" from it in the form of increased transaction fee revenue. The suit also alleges that CBOE has taken a "ringleader" role in the illicit activity in two major ways. First, the suit claims that CBOE designed the VIX-linked products and settlement process for ease of manipulation, consulting closely on changes with certain financial institutions that trade heavily in VIX Instruments, such as Goldman Sachs.

Second, the suit alleges that CBOE takes a laissez-faire approach to detection of manipulation and enforcement, allowing the unnamed financial institutions and trading firms to benefit from its inaction. The plaintiffs allege this includes keeping overview of part of the settlement process out of view of its regulators (FINRA and the National Futures Association (NFA)), keeping its own market surveillance unit weak and understaffed, and imposing "toothless" sanctions for violations.

The suit alleges CBOE does this because it benefits from the increased transaction volume and fees related to the manipulation. According to the complaint, contract volume on VIX futures and options has ballooned about 17,000-23,000 percent in the last 10 years. This skyrocketing in VIX instrument trading has increased CBOE’s revenue from transaction fees almost fourfold over that time. In turn, the growth in earnings has contributed to considerable growth in the value of the CBOE Global Market shares, the complaint asserts.

The complaint contends that the alleged unlawful conduct by the exchanges and unnamed defendants violates the Sherman Act and Commodity Exchange Act and has caused actual damage to traders who have transacted in VIX instruments. The suit seeks treble damages.

Related actions. Other actions alleging manipulation of VIX-linked products include:

  • Atlantic Trading USA, LLC v. Does, No. 1-100, 18-cv-01754, Northern District of Illinois;
  • Samuel v. Does, No. 18-cv-01593-AT, Southern District of New York; and
  • Musso v. Does, No. 1:18-cv-02269, Southern District of New York.

The case is No. 18-cv-2025.

Attorneys: Chad Emerson Bell (Korein Tillery LLC) for Jeffery Tomasulo.

Companies: CBOE Exchange, Inc.; CBOE Global Markets, Inc.; CBOE Futures Exchange, LLC

MainStory: TopStory CommodityFutures Derivatives ExchangesMarketRegulation FinancialIntermediaries FraudManipulation NewLawsuitsNews IllinoisNews

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