Judge Refuses To Identify Five Market Participants Accused Of VIX Manipulation

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Long before meme stocks came along and reddit discovered what Zero Hedge readers had known since 2013, namely that to outperform the market all one has to do is go long the most shorted stocks, there were inverse VIX trades and the relentless moneymaking juggernaut that was shorting volatility, i.e. collecting stacks of cash in front of a dormant volatility steamroller. But on Feb 5, 2018 the steamroller woke up with a vengeance, and shortly after the close, the infamous volumageddon event took place when a handful of the most popular inverse VIX strategies crashed from near record highs to zero in a manner of minutes as ETN liquidation triggers were activated, sending the VIX briefly to record highs and wiping out billions in value and leaving countless retail investors stunned and facing total losses.

Yet while to retail investors losses were in the hundreds or, at most, thousands of dollars (recall this was in the pre-stimmy stage when people cared about their money), some hedge funds got completely wiped out. One among them was LJM Partners, a Chicago-based fund  that lost $446.8 million in one day from the market moves, wiping out 86.5% of its assets in seconds.

And so LJM and more than two dozen other investors and fund managers sued over the next year to recover losses, claiming unidentified market participants that rigged the index “repeatedly posted and immediately canceled” tens of thousands of quotes for S&P 500 options, whose prices are used to calculate the VIX.

The plaintiffs, understandably furious at the events of Feb 5, claiming that unidentified market participants manipulated the VIX by posting S&P 500 options quotes that only stayed in the order book for milliseconds, not long enough for anyone to trade against but enough time for them to be incorporated into the value of the VIX. That technique, known as “flashing” and popularized back in 2009 first by this website, was unrelated to any legitimate positions the unidentified market participants held or wished to hold, but successfully manipulated the price of S&P 500 options and futures contracts, LJM claimed, even though the CBOE which is the Chicago-based owner of the VIX and the exchange where S&P 500 options trade, has  repeatedly dismissed claims of manipulation of the index.

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