The Seoul Central Prosecutors' Office said it was analysing data presented by the Financial Services Commission to enable it to summon bank employees.
The commission said Wednesday that it would suspend the bank's local proprietary securities and exchange-listed derivatives trading for six months from April 1, the toughest-ever penalty against a foreign securities firm.
It also filed a complaint with prosecutors against Deutsche Bank Korea and five employees, three in Hong Kong, one brokerage unit official in New York and one in Seoul.
They are suspected of gaining 44.8 billion won ($39.8 million) through illegal trading, it said.
Deutsche Bank expressed regret but said the move would disrupt "only a small fraction of its business" in South Korea.
"The subject matter of the referral is confined to very specific areas of trading activity and the majority of Deutsche Bank's activities in Korea will continue to operate normally," it said in a statement.
The German bank's Hong Kong unit and local securities unit had been under investigation for alleged market manipulation and unfair transactions that occurred last November 1, an options expiry day.
On that day the benchmark KOSPI index fell 48 points in the last 10 minutes of trading due to arbitrage trading between the spot and futures markets.
During that time about 2.4 trillion won in sell orders from foreign investors were processed, most of them through Deutsche Bank's local securities unit. The KOSPI ended 53.12 points, or 2.79 percent, lower at 1914.73.
Seoul, in common with other developing markets, has grown increasingly concerned at potential risks posed by rapid foreign capital flows.
In January local authorities announced new rules designed to reduce the risk of sharp stock market volatility triggered by derivatives trading.