Bill at VIX and More runs a table of all the rather odd opening prints in the SPX yesterday. Add them all up as he does and you find that $145 million worth of SPX puts went up, coincidentally at a time they were calculating the VIX october settlement price.
Some ATM calls traded too, so the investment was even greater.
To put that number into perspective, the Oct 25 calls alone in the VIX increased in value by some $100 million from Tuesday’s close to Wednesday’s settlement price. And also remember that the $145 million is not a pure expense, as the puts all have some value.
With the benefit of hindsight, that opening print does not seem like an incredibly out of line value. For one thing, the market opened ugly. For another, the VXO, which does not move all that differently from the VIX, opened near there, albeit 15 minutes into the trading day. And in fact the VXO and VIX pretty much tracked each other all day from that point on.
My hunch is that the trade did not work as well as planned. The VIX police presumably determine a settlement price based on each opening quote or print in SPX. And as you can see, one might have reasonably assumed that settlement price would be higher, based on those VIX “prints” in the first 15 minutes.
Now another question is whether this was all legal.
I am guessing yes. It is veritably against the spirit of everything, it’s just absolute manipulation. Or attempted manipulation. But whoever bought the contracts is entitled to do just that; buy the contracts. It’s always been my opinion that we never should have made a statistic tradeable. And this action certainly reinforces that opinion.
Now as to restoring our confidence in the financial system, that’s another story. This whole incident smells bad.
It also speaks to why we should not take every tweak in the VIX as gospel. The VIX got some love as an indicator because it ostensibly gauges fear levels in the options mart. But what significance is there in an artificially produced number that has no bearing on anything sentiment related?
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