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VIX Manipulation Identified

Some claim there was VIX manipulation on April 18 due to a spike near the open caused by an order imbalance. I have identified the manipulation on the chart below.

Below is the daily chart of VIX as of the close of yesterday, April 23, 2018.

I have placed a vertical marker on April 18 and a note.

Some people see manipulation because the index did not conform at the open to their expectations. There are rumors that they are suing CBOE. My opinion is that these people maybe do not understand what they are trading. I agree with the CBOE position in their letter.

In the markets there are occasionally imbalances. This is actually one of the factors that contribute to short-term trend formations. For example, if buyers cannot find enough sellers they raise their bids until more show up. Is raising a bid manipulation? We know many traders blame the markets for manipulation when instead they should be blaming themselves.

Especially VIX and volatility ETPs are a complex domain because they are derivatives or derivatives of derivatives.

If someone does not understand these products in sufficient detail, the best course of action is to stay away rather than to look for opportunities to sue the exchange because that will just incur additional cost with uncertain outcome. My suspicion is that some trade these products without sufficient knowledge of the details. The memories of those ruined by XIV ETP 96% drawdown and liquidation are still fresh:

It appears that many have not read the Credit Suisse XIV prospectus before trading XIV where the following is stated

The long term expected value of your ETNs is zero. If you hold your ETNs as a long term investment, it is likely that you will lose all or a substantial portion of your investment

In my opinion, accusations of manipulation are frequently admissions of personal failure. There are instances of actual manipulation but the imbalance in VIX options is probably not one of them.

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If you have any questions or comments, happy to connect on Twitter: @mikeharrisNY

Charting and backtesting program: Amibroker


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