A monthly pattern sees key prices jump just before the expiration of derivatives tied to the benchmark US gauge, directly affecting which contracts will pay out, according to a study posted online last week. The phenomenon is generating profits of roughly $3.8 billion per year for bullishly positioned investors, it said.
The authors of the paper — Guido Baltussen of Robeco, Julian Terstegge of Copenhagen Business School and Paul Whelan of the Chinese University of Hong Kong — struggled to find an explanation for the moves, leaving them to speculate that "manipulators" could be at work. Their hypothesis: traders may be taking advantage of a window of thin trading, pushing up the index either through futures or the pre-market to benefit their option positions.
That's a bold claim in the biggest and most liquid stock and options market in the world, and the trio concede it's hard to find tangible evidence to support it. It's also debatable whether buying in one part of the market to support positions elsewhere would constitute manipulation.
They also raised a more benign alternative theory familiar to most traders: Option market makers could be driving stocks up as they hedge their positions right before the Friday morning expirations.
Either way, the pricing anomaly is sure to grab attention on Wall Street, where investors have a long-standing paranoia over how much power large institutions wield over certain corners of the market. In recent years, concerns have been raised over everything from the VIX Index being rigged or options hedging driving S&P 500 swings to the possibility economic data is being leaked.
Whelan, Baltussen and Terstegge's paper raises important questions about a statistically significant pattern that appears to be minting cash for well-positioned investors.
"We care because it's a market inefficiency," Whelan said in an interview. "There could be hedge funds or professional customers out there which are profiting from this effect."