“The VIX settlement appears susceptible to manipulation, and that the aggregate evidence aligns itself with what one would expect to see in the case of market manipulation of certain settlements,”according to a new research paper from researchers John M. Griffin and Amin Shams in a nutshell there is evidence of VIX manipulation.

The VIX Index is constructed using the implied volatilities of a wide range of S&P 500 index options, which together show the market’s expectations of 30-day volatility. This index is used to calculate prices for a host of other financial instruments and hedging strategies. The widespread use of the the t makes it a target for manipulation, which has become increasingly common in recent years. Cases investigating LIBOR, FX, gold, and sliver manipulative trades have all been investigated recently, some with severe outcomes. However, the authors of the report note that while these manipulation events have attracted plenty of press attention, the has been little academic research examining specific features of these markets and the mechanisms that allow for VIX manipulation.

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The VIX itself isn’t a wholly representative metric of volatility. An older paper byAnderson, Bondarenko, and Gonzalez-Perez (2015) demonstrates that the VIX index can exhibit deviations from true volatility due to the inclusion criteria of illiquid options. This figure, would, in theory, be hard to manipulate as futures and options on the VIX have a relatively large volume.

To influence the monthly settlement value of VIX derivatives, a speculator would have to move the price of lower-level out of the money SPX options at settlement value, to influence the outcome of expiring upper-level VIX derivatives.

VIX manipulation – who, what, where, why?

Even though the sheer size and complexity of the VIX market makes it difficult to manipulate, the paper argues that manipulators have left some prints in the data.

For example, research shows that at the exact time of monthly VIX settlement, highly statistically and economically significant trading volume spikes occur in the underlying SPX options. The spike seems to only occur in the out of the money SPX options that are included in the VIX settlement calculation.

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What’s more, there’s no spike in volume for the similar S&P 100 index or SPDR S&P 500 ETF options that are unconnected to volatility index derivatives. Trading volume appears to follow a pattern whereby traders move prices by optimally spreading their trades across strike prices, increasing the number of trades in the deep out of the money put options consistent with the VIX formula. Normally, deep out of the money options rarely trade.

By studying all of the above factors between 2008 to April 2015, the paper presents data which shows that not only is it feasible to influence the VIX settlement, but there’s also present price and volume patterns consistent with what you would expect to see from such strategic trading.

Transaction volumes that fit this framework amount to $1.81 billion for the period considered, for an average of 31 basis points of movement in settlement values. Considering that over the sample period over $108 billion of VIX futures and options were exposed to the settlement relative to the size of SPX options at settlement, such a relatively small scale VIX manipulation is highly cost-effective for a large trader.