Dimension Data's dramatic price surge prompts inquiry

The London Stock Exchange is understood to be investigating Friday's erratic trading in Dimension Data, the South African computer services group, which is about to join the FT-SE 100.

The London Stock Exchange is understood to be investigating Friday's erratic trading in Dimension Data, the South African computer services group, which is about to join the FT-SE 100.

Dimension's shares ended on Friday at 1000p, a staggering increase of almost 50 per cent from the previous day's close of 669p.

Dealers said that the dramatic rally was caused by the aggressive buying of the shares by an investment bank said to be exploiting the need of index funds to acquire Dimension shares before the company enters the FT-SE 100.

Dimension Data will join the blue-chip index tomorrow. There appeared to be no other reason for the share price's huge appreciation, which was almost entirely reversed in after-hours trading.

The LSE has become increasingly concerned in recent years about allegations that banks have been guilty of deliberately manipulating closing prices to suit their ends.

On this occasion, it is alleged that the bank bought large quantities of Dimension shares in the knowledge that index funds would have to pay the closing price for the stock, whatever its level.

These funds, which adjust their portfolios to bear the closest possible resemblance to the FT-SE 100 or another basket of shares, are often obliged to buy and sell shares almost regardless of the prices they pay or receive.

On Friday, they were forced to pay up for Dimension Data shares before they entered the FT-SE 100. There is no suggestion of any wrongdoing on the part of Dimension Data, whose debut in the blue-chip index will mark a major milestone for a company which only floated in London two months ago.

Dimension, which is also quoted on the Johannesburg Stock Exchange, is the latest of a number of South African companies, including Old Mutual and South African Breweries, to acquire a London listing. It joins the FT-SE 100 at the expense of such luminaries as Rolls-Royce.

Index funds have become increasingly popular with investors eager to match the large returns generated in most of the last few years by the FT-SE 100.

Their popularity reflects the failure in recent years of other investment strategies, particularly of those fund managers who have tried to find value among old-economy companies that have been neglected by the rest of the market.