UPDATE 1-Cboe, market makers targeted in VIX manipulation lawsuit

(Adds details from complaint, comments, background, byline)

April 27 (Reuters) - A trader has filed an antitrust lawsuit accusing seven market makers, including Citigroup Inc and Citadel Securities LLC, of conspiring to manipulate Wall Street’s main gauge of future stock market volatility, the VIX, at investors’ expense.

The complaint filed on Friday also accused Cboe Exchange Inc , which administers the VIX, of taking a “laissez faire” approach that allowed the manipulation to flourish, out of “greed” for higher transaction fees and revenue.

William Siegel, a trader in VIX futures and options, filed his proposed class-action lawsuit in Chicago on behalf of investors in VIX derivatives since Jan. 1, 2008.

Cboe and Citadel did not immediately respond to requests for comment. Citigroup declined to comment.

The VIX derives its price from S&P 500 options, and some investors have complained about suspected rigging to make positions more profitable when settled.

In February, an anonymous whistleblower sent a letter to the U.S. Securities and Exchange Commission and the Commodity Futures Trading Commission alleging VIX manipulation.

Cboe called the letter “replete with inaccurate statements, misconceptions and factual errors,” but Siegel said others like former SEC Chairman Harvey Pitt and former CFTC Commissioner Bart Chilton have suggested that rigging was possible.

The lawsuit said manipulation has caused “billions of dollars in losses” for investors in VIX instruments, and Cboe has taken “no effective action” to stop it.

After trading between 10 and 20 for several months, the VIX soared above 50 on Feb. 6 amid a slump in U.S. stock prices.

Traders betting on a stable or falling VIX suffered losses, and some investments indirectly linked to the gauge lost more than 80 percent of their value in one day.

On Monday, Cboe told customers it is assessing possible steps to improve the VIX settlement process.

Siegel is represented by the Hausfeld law firm, whose specialties include lawsuits over rigging in financial markets.

The case is Siegel v Cboe Exchange Inc et al, U.S. District Court, Northern District of Illinois, No. 18-03021. (Reporting by Jonathan Stempel; Additional reporting by Saqib Iqbal Ahmed; Editing by James Dalgleish)