January 1, 2021
I am the author of the paper \"Market Impact of Predictable Flows: Evidence from the VIX Futures Market\", which addresses a number of issues relevant to this case. In short, I find that the rebalancing flows from leveraged and inverse VIX products are usually absorbed in an orderly fashion by liquidity providers and are not associated with predatory trading or other forms of harmful behaviour by other market participants. On the contrary, my findings point to increased liquidity provision and (relatively) smaller market impact on days with large rebalancing flows. Essentially, I attribute this results to beneficial competition among liquidity providers to take the other side of the uninformed rebalancing flows (which liquidity providers can safely do as they know that such flows are not motivated by private information).
All in all, I view the existence of inverse and leveraged VIX products as beneficial to market quality.
However, I do see a potential benefit from distributing rebalancing flows more evenly across the trading day instead concentrating the flows around the time of the daily settlement. This is simply due to the limited risk capacity of the market on days when volatility spikes such as February 5, 2018.