THE world is getting too small and investors are becoming too global for the policing of insider trading to be held back by national boundaries.

We are living in an age where money can be transferred at the click of a mouse and information travels faster than avian flu. In turn, this is proving a nightmare to police. So far, the American authorities have proved more effective than most in bringing about insider-dealing convictions, but they are only scratching the surface. To control it, what is now required is a global unit capable of tracking some of the illegal share trades that give international financial markets a bad name.

Last week investigations were launched into suspected dodgy trading in Dow Jones ahead of a takeover approach and, separately, a former Morgan Stanley analyst and her husband were arrested and charged with misusing nonpublic information about pending merger deals.

But, as my colleague Grant Ringshaw explains on page 8, too many dodgy trades are still going undetected and new investors are coming into the market who do not feel bound to play by the rules. It is not just in equities where the abuse is happening, but also debt markets and derivatives, areas that are hard to monitor.

Take the absurd 21% intra-day rise in Rio Tinto’s share price last week on ill-founded rumours that rival BHP Billiton was considering a merger. If ever there was a case of market manipulation that was it.

There are suspicious trades in nearly every big takeover prior to it being announced, but rarely does it lead to a prosecution. The onus of proof to bring a successful case and the resources required to mount an investigation are simply too high.

Britain’s regulator, the Financial Services Authority, is particularly concerned by the role of internet blogging, where financial information is posted on the net, without any regard to whether it is true.

The other growing problem is the way that hedge funds appear to be colluding and acting like a concert party. Stock-exchange rules say if this is the case, then it must be declared.

It is unclear to what extent hedge funds are sharing their investment strategies, but a number of recent deals where they piled into the same situation appears to border on market abuse.

The problem of policing insider trading is going to get bigger. There are now vast pools of capital in the Far East that are capable of single-handedly moving markets. The biggest of these is China’s new Foreign Exchange Investment Fund, which will be the world’s biggest state investment company.

China wants to make its foreign-exchange reserves work harder. At a conservative estimate, this fund could start with $300 billion (£151 billion) and grow by up to $100 billion a year.

No-one knows what the investment strategy will be, but it will be much more adventurous than simply holding dollars.

This fund could make strategic investments buying oil, gold and other commodities. It could take stakes in overseas banks, miners and property. The options are multiple and the amount of capital that could be deployed has the potential to turn investment strategy on its head.

A fund like this is manna from heaven to market manipulators. Just one false rumour that this fund was moving out of dollars, or stockpiling copper could dramatically hit prices – or governments.

Regulators from around the world must demonstrate that they are on top of this new phenomenon, but it will be a big struggle. Heady times THERE is little doubt that we are getting close to the top of this cycle, but I tend to side with HSBC, which put out a note last week saying “the froth is yet to come”. The bank believes the current round of deals taking place is simply a reminder that the underlying investment case for equities is a strong one.

But if you are looking for froth, Alcoa’s $33 billion hostile bid for Alcan, its Canadian aluminium-mining rival, could well serve it up. If ever there was a hot sector with metal prices soaring and ambitious chief executives, this is it.

All the big players in the industry, from Rio Tinto to BHP Billiton and Brazil’s CVRD are looking and potentially want a piece of the action.

Rio could bid for Alcan, and BHP could go for Alcoa, but there is no need to rush. Alcoa’s proposed takeover will face antitrust issues and the contest will have more twists and turns than a switchback road through the Alps. Nor is it impossible that BHP and Rio could ultimately merge. The two sides came close to it four years ago.

Up periscope THE reinvention of Babcock International over the past six years is a textbook case of why investors should back management teams. Babcock was then a ragbag of legacy engineering businesses, on the edge of financial collapse and valued at £86m. But under Gordon Campbell, who became chairman in 2001, and his lieutenants Peter Rogers and Bill Tame, the entire UK portfolio has been turned over. The group is now a support-services operator valued at £1 billion and is tied to a handful of big customers, including the Ministry of Defence and National Grid.

Last week the group snapped up DML, the company that owns Devonport dockyards, a deal part-funded by a £90m placing. The acquisition makes it responsible for the whole of the UK nuclear submarine fleet. Babcock’s fall and rise is indicative of the changing face of the economy – it is essential that companies adapt. Not everyone gets it right, but Babcock has shown how it can be done.

john.waples@sunday-times.co.uk

Times Recommends

• C&G axed - 1,660 jobs to be lost
• UK house prices rise 1.1% as buyers return
• Mixed reaction to US banks repaying bailouts