The role of intermediaries in derivatives markets: Evidence from VIX options

Consistent with models of intermediaries who absorb demand pressure from end -users and respond by changing prices, net option demand is positively related to option prices in the market for VIX puts and calls. VIX and SPX option markets are integrated: market -makers absorb end -users' net long volatility positions and net demand affects prices across markets. Net demand changes in the most liquid markets result in spillover effects between the VIX and SPX markets. A dynamic characterization of prices and net demand suggests that VIX option markets and the SPX put market are integrated, while the SPX call market is more segregated.