"It is believed that the city professionals passed inside information to traders [either directly or via middlemen] who traded on this information and have made significant profits as a result," the FSA said in a statement.
A spokesman for Deutsche Bank said "we are co-operating with authorities as they look into this matter".
Industry sources named Julian Rifat, an equity trader from Moore Capital; Martyn Dodson, a managing director at Deutsche Bank and Graeme Shelley, a trader at brokerage Novum Securities as among the people questioned.
Clive Roberts, the head of European sales at BNP Paribas's partly-owned Exane unit -was also said to be among those detained.
Britain's Telegraph newspaper said west London businessman Iraj Parvizi, a director at fund Aria Capital, was also implicated.
Moore Capital, a New York-based operation with a London unit, said the investigation of its employee did not involve any funds managed by the group.
The FSA's investigation, carried out together with the serious organised crime agency (Soca), a special police unit, began in late 2007 as part of the regulator's attempt to clamp down on market abuse, fraud, and poor systems and controls.
It has toughened up its enforcement policy after years of being criticised for not doing enough to stop market abuse.
In September 2008, the FSA fined Steven Harrison, a former hedge fund manager at Moore Europe Capital Management, for market abuse, agreeing he would not work as a trader or fund manager for a year.
Harrison had told a colleague to buy senior notes in chemicals maker Rhodia after
having been given inside information from inside Credit Suisse, the FSA said at the time.
In 2009, it levied a record level of fines and launched its first two successful criminal prosecutions.