Chicago firm files lawsuit alleging manipulation of Cboe volatility index

NEW YORK (Reuters) - A Chicago-based trading firm has filed a lawsuit seeking to uncover the identities of traders who may have been manipulating Wall Street’s main gauge of future stock market volatility, the VIX index, causing losses for other investors.

The proposed class-action lawsuit was filed in the U.S. District Court for the Northern District of Illinois late on Friday.

The lawsuit, filed on behalf of Atlantic Trading USA, LLC and other parties, alleged the firm suffered financial losses as a result of manipulation of certain contracts related to the Cboe Global Markets, Inc's CBOE.O volatility index .VIX.

After trading in range between 10 and 20 for several months, the VIX spiked to a high of over 50 on Feb. 6 as the U.S. benchmark S&P 500 stock index slumped nearly 12 percent in 10 days. Traders betting on the VIX staying flat or falling were hurt in the process and this may have exacerbated selling pressure on stocks.

The lawsuit comes five weeks after some products indirectly linked to VIX lost more than 90 percent of their value in one day following the U.S. stock market selloff in early February.

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

At the time, the Cboe said in a statement the letter was “replete with inaccurate statements, misconceptions and factual errors,” but asked Wall Street’s self-funded regulator, the Financial Industry Regulatory Authority (FINRA), to look into the matter.

The lawsuit alleged that unknown parties traded a “substantial” number of S&P500 index options for the sole or main purpose of influencing the final settlement price of VIX derivatives.

The plaintiff signaled an intention to issue a subpoena to the Cboe, for information identifying the unnamed traders, a statement by the plaintiff’s lawyers Cafferty Clobes Meriwether & Sprengel LLP and Cohen Milstein Sellers & Toll PLLC, said on Monday.

Cboe declined to comment on the lawsuit filed on Friday. The case is Atlantic Trading USA, LLC v. Does 1-100, 18-cv-01754.

The VIX estimates the expected near-term volatility conveyed by S&P 500 .SPX index option prices. The Cboe calculates an official settlement level of the VIX based on a special monthly settlement auction of S&P 500 options, and the settlement price determines whether large blocks of VIX futures expire worthless or turn a profit.

A separate lawsuit, filed in late February in the U.S. District Court for the Southern District of New York, also alleged manipulation of the volatility index.

That case is Samuel v. Does, 18-cv-01593-AT.

Reporting by Saqib Iqbal Ahmed; editing by Clive McKeef