The complaint adds another level of analysis by targeting exchanges that trade correlated products, potentially setting up a class action lawsuit:

Although it is not surprising that an inverse exchange-traded fund would lose nearly all its value should the underlying security appreciate over 100% rapidly, we contend that market manipulation is playing a significant role in driving the price of VIX ETPs. And as described below in an excerpt from a widely circulated note by hedge fund Artemis capital in Q3 2015, regulators arguably should have taken action to address the reflexive self-fulfilling danger created by inverse VIX ETPs which require the ETP managers to purchase large amounts of VIX futures around market close when the futures rise rapidly, thereby accelerating their own demise. Knowing that there is such danger created by these products, why did the CME Group not implement circuit breakers on the VIX futures just like it exists for S&P futures for example?

Given the high correlation between VIX and S&P, by not placing any safeguards around an unstable market structure for VIX products, the exchange exposes the entire equity market to unnecessary systemic risk. The turmoil in financial markets, which cost American and foreign investors several trillions this week, originated from a known flaw in the market structure by most sophisticated practitioners in the field, and the magnitude of losses experienced calls for accountability from both the exchange and market actors who engage in the manipulation of the VIX.

Artimus Capital, for its part, is having issues with the coverage it received because the volatility hedge firm prospered during a market crash. In a letter to The Guardian, the fund that profits as a volatility hedge disputed how it was described:

Artemis is not a gambling bet on other people’s lives and savings. I’m not making the “Don’t Pass Bet”, and no one at Artemis is out there rooting for the market to collapse. It would be insultingly cavalier and reckless to disclose, let alone brag about, making millions of dollars at the expense of others’ losses.

The Chicago Board of Options Exchange, for its part, maintains that its systems operated properly. In a statement to CNBC they said:

We take our regulatory responsibilities and the oversight of our markets very seriously. This letter is replete with inaccurate statements, misconceptions and factual errors, including a fundamental misunderstanding of the relationship between the VIX Index, VIX futures and volatility ETPs, among other things. As a result of these errors, we feel the conclusionary statements contained in this letter lack credibility.

The real question might not be who made or lost money on the market crash – that is the point of a risk management hedge. The real question that could get sticky and expensive is the liability.

The following article was republished with permission from Valuewalk.

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