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Prosecutors probe market manipulation on Frankfurt Exchange

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(Globalpost/GlobalPost)

FRANKFURT (Reuters) - German prosecutors said on Monday they were investigating possible market manipulation of some individual shares on the Frankfurt Stock Exchange by liquidity providers artificially inflating order volumes for small and midcap companies.

Liquidity providers are specialist traders tasked with ensuring that the stock exchange can provide a price quote even for illiquid small stocks.

"The investigation has been ongoing since the end of 2012," a spokeswoman for the Frankfurt prosecutor's office said on Monday, following a report in business weekly WirtschaftsWoche.

Markets regulator regularly looks at cases of unusual market movements but it is rare for a case to be referred to prosecutors.

Neither the prosecutor's office nor Deutsche Boerse would elaborate when asked by Reuters as to which companies and which stocks were being investigated.

At the end of November, Deutsche Boerse wrote to all market makers active on the Frankfurt Stock Exchange saying they had reported suspicious trading behavior to regulators.

"Our attention was drawn to some cases where we observed extraordinarily high order volumes in some stocks by some specialists," Deutsche Boerse said at the time.

Such trades represented a significant part of overall daily volumes, the exchange said at the time.

German weekly magazine WirtschaftsWoche reported that one market maker deliberately pushed volumes in an unnamed stock to get it included in one of the indexes operated by the Frankfurt Stock Exchange.

Frankfurt is home to the DAX blue-chip index, the MDAX, mid-cap index and the SDAX small-cap index.

Volumes of trade are a key criteria whether a particular stock is eligible for inclusion in an index. Moving into a given index often provides a wider investor base for trading in a given stock, potentially raising its value for a brokerage.

A Deutsche Boerse spokesman said that trading volumes alone are not the only criteria used to determine which stocks will be included on Deutsche Boerse's indices.

In a statement on Monday, Deutsche Boerse said. "The Trading Surveillance Office investigates every suspicion of price manipulation elaborately and systematically. It immediately involves German regulator BaFin and the management board of the Frankfurt Stock Exchange if it finds any substantial evidence."

(Reporting by Kathrin Jones and Edward Taylor; editing by Patrick Graham)

http://www.globalpost.com/dispatch/news/thomson-reuters/130617/prosecutors-probe-market-manipulation-frankfurt-exchange