Market Manipulation in the VIX. Are illiquid options regularly used to manipulate the cash settlement?

Text sample: Chapter 2.3, Product Evolution: First moves in the direction of today's VIX can be found in 1987, when Brenner and Galai published their "Sigma Index". From the beginning on, it was meant to be the underlying for futures and options. Five years later, The American Stock Exchange investigated the feasibility of a volatility index, using the name "Sigma Index", proposed by Brenner and Galai, as working name. In 1993, Cboe Exchange, Inc., made a first version of the VIX tradable. The original version was developed by Robert Whaley and measured the 30-days implied volatility of at-the-money options on the S&P 100. In 2003, Cboe Exchange, Inc., worked on a di erent formula with Goldman Sachs. They extended the VIX to the S&P 500 and constructed the formula in today's form, only neglecting weekly options, which are included in today's form. The inclusion of the weekly options took place in 2014. Since that point in time, no changes to the VIX have been made. 2.4, Investors' Usage and Derivatives: Cboe Exchange established (cash-settled) futures on the VIX in 2004 and options on the VIX in 2006. In particular the latter are a highly successful product with more than 800 000 contracts traded daily on average. Due to ongoing trading, Cboe Exchange calculates the index continuously in 15-second intervals and publishes it. When options and futures expire, a final transaction takes place to transfer the profit or loss (if existing) to the beneficial owner. This procedure is called settlement. Such derivatives on other instruments can be settled by delivering the underlying, for example the corresponding stock or commodity. When the underlying itself is delivered physically, the settlement is called physical. Such a physical settlement is not practical and does not make sense in the case of the VIX: A huge number of (illiquid) options would need to be delivered. Moreover, there is the second term in the formula containing the forward VIX level implied by

Tim Maximilian Baumgartner, born in 1997, studied Mathematics and Economics at the University of Ulm and at Fudan University, Shanghai. During his studies, he put his focus on Finance and Discrete Mathematics. In parallel, he committed himself voluntarily, lastly as member of the Executive Board of the German Association of Student Initiatives ("Verband Deutscher Studierendeninitiativen e.V."). He gained professional experience in Investment Banking and in a Big Four Audit Firm.