A class action lawsuit to uncover the identities of traders who may have been manipulating the VIX has been filed by a Chicago-based trading firm. The alleged manipulation caused financial losses for investors.

Understanding the VIX

The Chicago Board Options Exchange (CBOE) Volatility Index is represented by the ticker symbol VIX. The VIX shows the stock market’s expectation of volatility for the next 30 days. It is used to measure market risk. The VIX value is established by using the price options on the S&P 500 to estimate the volatility of those options between the current date and the expiration date. VIX values less than 20 are considered less volatile and anything over 30 is generally linked with future market volatility.

Following a spike in the VIX to 50 and a stock market selloff, an anonymous whistleblower sent a letter to the U.S. Securities and Exchange Commission and the Commodity Futures Trading Commission (SEC) that alleged manipulation of the index. The lawsuit claims that unknown parties allegedly traded “substantial” numbers of S&P500 index options in order to manipulate the VIX.

The risk of stock manipulation

Stock manipulation is the deliberate act or attempt to interfere with the market to inflate or deflate the price of products, securities, commodities or currency. Market manipulation is prohibited by the Securities and Exchange Act of 1934. Although it is prohibited, it can be difficult for authorities or market regulatory agencies to detect. In the case of the alleged VIX manipulation the whistleblower brought the issue to light.

Penny stocks are often subject to manipulation because they are plentiful and not watched as closely by analysts and regulators. However, medium and large cap firms are at risk for manipulation as well. A common practice to manipulate stocks is to pump up the demand by heavy promotion before the traders dump their shares, which causes the prices to plummet.

Thoroughly researching the investor and the investment option before deciding to invest money is the easiest way to head off a scam. The SEC has resources available to perform background checks on investment professionals. Trust your instincts; if something feels off or sounds too good to be true, it probably is not a legitimate investment opportunity.

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