FMA mum over manipulation probe but industry supportive.

Signs that the country's financial watchdog is cracking down on manipulative stock trading should bolster investor confidence in the market, says a sharebroker.

There is growing speculation that the Financial Markets Authority is investigating a high-profile local fund manager over alleged market manipulation.

The regulator would not confirm the probe. "We don't comment on whether or not we are investigating - particularly in secondary markets," a spokesman said.

But it seems an open secret in the funds management industry.

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Market manipulation involves deliberate attempts to interfere with the market to create artificial, false or misleading appearances in supply, demand or the price of securities.

Sources said the FMA probe revolved around a single employee at the firm, with the alleged activities involving manipulative trading that aimed to boost the firm's monthly performance and adversely impact competitors' performance.

James Smalley, of sharebrokers Hamilton Hindin Greene, said market manipulation undermined investor confidence and trust in the market.

The temptation to engage in the practice could arise when a stock portfolio had performed poorly over a month or quarter, he said.

"To close a certain stock that might be a large part of the portfolio, at a higher level, can help offset underperformers in other parts of the portfolio."

Smalley said it was positive that the FMA appeared to be flexing its muscles around market manipulation. "Hopefully it shows people that the regulator is out there doing its job."

Market manipulation has been a key focus of the FMA since it was set up in 2011, when it replaced the Securities Commission, which was widely viewed as ineffective.

Its case against Diligent Board Member Services founder Brian Henry, launched in 2013, was the first brought in NZ. Henry last year admitted to manipulation involving orders and trades in Diligent shares and was ordered to pay a $130,000 penalty after settling with the FMA.

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And last month the watchdog warned an "inexperienced" online trader, who wasn't named, over suspected manipulative trading.

Under the Financial Markets Conduct Act, an individual convicted of market manipulation can be jailed or fined up to $500,000, while a company can face a fine of up to $2.5 million.

NZX chief executive Tim Bennett said last week that keeping a lid on market manipulation was particularly important for retaining the confidence of overseas investors.

"People won't trade in our market, particularly offshore, if they feel it's subject to manipulation ... because they are naturally disadvantaged."