Trading on the London Stock Exchange was "dirtier" over the past two years compared to 2005, indicating that insider dealing on merger and acquisition information has increased.

The Financial Services Authority (FSA), the City watchdog, uses informed price movements (IPM) - stock price changes in the two days ahead of regulatory announcements - to measure market cleanliness. An IPM indicates that the share price movement was abnormal compared to how the price behaved in a non-announcement period.

The regulator found that in the two days before a company announced a takeover, IPMs were evident in almost 29 per cent of cases last year, up slightly on 2006, and markedly higher than 2005 when IPMs appeared in 23.7 per cent of cases. In 2000, there were IPMs prior to 24 per cent of takeover announcements.

The FSA said: "We consider that the level of IPMs for takeovers is too high and is not reducing as we would wish".

But the regulator said that IPMs did not necessarily indicate only the existence of insider trading. Information circulated by analysts or the media, deliberate leaks by companies and traders trading on the back of activities by other traders with insider knowledge could also cause IPMs, the FSA said.

Sally Dewar, the FSA's managing director of wholesale and institutional markets, said: "Market misconduct, particularly in the form of insider dealing and market manipulation is, put simply, cheating and reduces investor confidence in UK markets".

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