Market participants who peeked at the widely watched CBOE Volatility Index during Monday and Tuesday's rocky market sessions were treated to a wonky chart that looked a bit like an accordion, with volatility appearing to rise precipitously and then fall back every minute.
According to the Chicago Board Options Exchange, this issue was caused by the dissemination of unreasonably high ask prices for S&P 500 options. The CBOE is investigating how exactly this occurred, but says it now appears to have been solved by a fix made by S&P 500 options market makers.
The CBOE Volatility Index, better known as the VIX, is often called the market's "fear indicator," because it generally provides an indication of how much investors are willing to pay for protection against the market.
To compute this indicator, the CBOE takes a measurement of the prices of S&P 500 options. Since more firms use S&P 500 options to hedge stock positions rather than to speculate on upside, the VIX tends to show how worried investors are about the market, and consequently enjoys an inverse relation to the S&P.
Starting on Friday, however, the chart of this closely watched indicator went a bit haywire. And for much of Monday and during Tuesday morning, the VIX was appearing to rise and fall as much as 20 percent every minute.