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Regulators should do more to halt the frenzy of trading that appears to occur prior to the announcement of many takeover deals, some of Canada's most powerful investors say.

Shares of Algoma Steel Inc. soared 21.6 per cent for three days last week before the company revealed late Wednesday that it was in talks with a potential buyer, later confirmed to be German steel maker Salzgitter AG.

Stephen Jarislowsky, chairman of Jarislowsky Fraser Ltd. in Montreal, doesn't own any Algoma shares but said the trading looked suspicious, noting abnormal moves before deals are announced “has been an ongoing issue for years” in Canada.

Christopher Thomas of Measuredmarkets Inc., a Toronto-based research firm that specializes in market trading analysis, says Algoma's trading was clearly out of the ordinary based on an analysis of its share price, trading volume and number of individual trades during the days leading up to its press release on Wednesday.

But Algoma is far from the first case in which a company's shares have climbed before news about a possible takeover deal.

Eight years ago, The Globe and Mail analyzed 28 friendly deals over a one-year period, each with a value over $150-million, and found half of the target companies saw their share price rise at least 25 per cent between the time the two companies first began talking and the night before the deal was disclosed to the public.

A recent U.S. study found a similar problem, concluding 41 per cent of companies subject to a takeover bid exhibited abnormal and suspicious trading in the days and weeks before the deals became public.

“To me, this is a black mark on the market,” said Claude Lamoureux, chief executive officer of the Ontario Teachers Pension Plan. “It means that somebody is talking who should not be talking — that's really what it says.”

Mr. Lamoureux said the capital markets need to see a few high-profile prosecutions to convince all players that illegal insider trading isn't a low-risk practice that anyone can easily get away with.

But cracking down on insider trading in advance of deals has proved to be one of the toughest tasks for police and securities regulators to tackle.

Last week, for example, the Royal Canadian Mounted Police laid charges against a federal civil servant who was accused of personally buying securities in advance of a government announcement about income trust policy measures in 2005. But the RCMP did not accuse anyone of leaking information to others that would explain the huge amount of trading activity in the markets before the announcement.

Police investigators said there was no evidence to support charges related to the apparent information leak. RCMP chief superintendent Dan Killam said a probe of that sort is complex.

“They're like shovelling clouds some times.... So it's not as clear cut as people like to think. It's one thing when you catch someone with a smoking gun, but when you have all these different elements, it's complicated.”

Laurence Booth, a professor of finance at the University of Toronto, said it can be extremely difficult for regulators to prove cases of suspected insider trading in advance of major deals.

One problem, he said, is the large number of people who know about a deal before it is announced — executives, lawyers, accountants, investment bankers and other advisers.

“Trying to track all these people down is very, very difficult,” he said.

It is not unusual for dozens of people to work on friendly bids where the two sides are collaborating. Studies have found far less evidence of unusual trading in the case of hostile bids, which typically involve fewer people who know about a bid before it is unveiled.

Another difficulty lies in winning cases when charges are laid. It is legally difficult to prove someone relied on insider information when trading. In many cases, insiders defend themselves by arguing their trading was motivated not by any specific insider knowledge but by other factors, including market rumours or media reports of a pending bid.

But Mr. Lamoureux said while there are clear legal difficulties, more cases still need to be tackled by regulators to convince skeptics that insider trading is truly wrong.

“It looks like it didn't cost anything, but it does cost the market in general, and there's the integrity of the market it attacks,” he said.

“I think there's a downside for all of us. To me, it's something that can never be accepted. I can tell you here [at Teachers] if someone should talk and I found out about it, they'd be out of a job.”