Wall Street regulators are reported to be investigating allegations of market manipulation by algorithmic traders during the recent bout of stock market volatility, through trades based on the Vix index in Chicago.
The Financial Industry Regulation Authority (Finra) is examining allegations from an - as yet unnamed - whistleblower that the Chicago Board Options Exchange's (CBOE) Volatility Index known simply as the Vix as being manipulated by "sophisticated algorithms".
The allegations, first reported by the Wall Street Journal on Tuesday, might help explain the record percentage spike on the Vix on 6 February - a jump of 124%, but the CBOE was careful in its comments following the news.
Greg Hoogasian, the exchange's chief regulatory officer, said in a statement: "CBOE has a dedicated regulatory department that works with Finra to monitor certain trading activity for our securities markets, including trading activity that could impact the Vix settlement."
Claims from the whistleblower, presented in a letter, suggested that market manipulation by "unethical electronic option market makers" had led to multiple billions of profits being effectively taken out of the hands of institutional and retail investors.
CBOE dismisses claims
On Tuesday, CBOE dismissed the claims in a statement that said: "This letter is replete with inaccurate statements, misconceptions and factual errors, including a fundamental misunderstanding of the relationship between the Vix Index, Vix futures."
The Vix index itself cannot be traded - only through derivatives and exchange-traded products - but there have been prior allegations that the settlement prices of futures that form pricing metrics for the index could be manipulated.
John M Griffin and Amin Shams of the University of Texas wrote a paper last May suggesting the sale of certain "out-of-the-money" S&P 500 options moments before they are settled that are "consistent with market manipulation".
Finra's investigations into the allegations will almost certainly involve examination of the causes behind the implosion earlier this month of two exchange-traded products - VelocityShares Daily Inverse VIX Short-Term ETN and the ProShares Short VIX Short-Term Futures ETF.
On Tuesday, the Vix index traded benignly, and finished the session at 24.97.