It's a phenomenon that makes investors cynical and challenges efforts by regulators to keep a lid on insider dealing.

'That's quite normal in the Hong Kong stock market, especially for third-line or fourth-line stocks,' said Ricky Tam Siu-hing, chairman of the Hong Kong Institute of Investors. 'A lot of people in the market seem to know the news before the company [announcement] or the general public, so they buy ahead of it.'

Shares in one of the companies concerned, Continental Holdings, rose 17.3 per cent over four days. Shares in another, Pearl Oriental Innovation, rose 61 per cent in a week. Shares in Jackin International rose 13.6 per cent in a day. In each case the sharp movements were followed by a suspension of trading and an announcement.

Insider dealing is generally defined as an act of trading that leverages privileged information not available to the general market. It has been punishable as a civil breach of the law for many years in Hong Kong but was only classified as a criminal offence in 2003.

It is sometimes described as a victimless crime, but a trader with inside knowledge who buys shares from someone who doesn't is taking advantage of the seller; and a perception that insider trading is rife undermines the integrity of the market, making serious investors less likely to want to participate.

Hong Kong's vibrant trading culture is still strongly influenced by word of mouth; deals can be done during dim sum and tips shared over tea. It does not take long for rumours to gain momentum given the city's small size.

Inadvertent insider dealing may also stem from a lack of legal backing for local listing rules. It is up to companies themselves to decide which information is price-sensitive and when to report it to the market.

'In US or European management teams, they have a strong mind to keep the secret,' Tam said. 'But in Hong Kong it's different, the culture is different.'

In the week that shares in Continental Holdings rose 17.3 per cent over four days, trading turnover on three of those days ballooned to near one-month highs. The conglomerate suspended trading on the fifth day, Friday, November 20, and later announced it was buying a mainland gold mine.

Continental says it did not see a connection between the announcement and its share price movement.

'The company has put its best effort to ensure confidentiality of the relevant information on the planned acquisition of the mainland gold mine until publication of the announcement,' it said in a statement.

Pearl Oriental Innovation also experienced a trading bump before a major announcement. The company, which recycles plastics and invests in energy production, saw its share price rise 61 per cent during trading in the week of January 3, before suspending trading the following Monday. The daily average trading volume for the stock that week was 29.5 million shares, nearly eight times the previous week's average 3.7 million shares.

Pearl Oriental announced after the market closed on Thursday, January 7, that it was aware of the unusual movement but not of the reasons behind it. It was in discussions related to possible acquisitions but nothing was definite and it had already disclosed that it was holding such negotiations, it said in the statement.

Two weeks after trading in its shares was suspended, the company announced it had struck a deal for an oil and natural gas producer.

Shares in Jackin International, a processor of used printer toner cartridges, rose 13.6 per cent on December 17, and trading volume was five times larger that session than in the previous day's. The company halted trading the next day and announced an acquisition a few weeks later.

Pearl Oriental declined to respond to questions. Jackin International did not respond to requests for comment.

Local authorities have taken fresh steps to change the perception that Hong Kong is a haven for insider trading. The Securities and Futures Commission has stressed that companies must improve their internal controls to ensure that confidential information is handled appropriately and released in a timely manner.

'The governance of information is absolutely vital,' said Mark Steward, the SFC's executive director of enforcement. 'Delaying an announcement of information increases the chance that information will leak and increases the chances of insider dealing.'

The government is set to renew discussions over the next few months on a long-delayed plan to institute legal backing for local listing rules, creating more incentive for companies to be forthcoming. Adopting a standard yardstick for corporate reporting would give all market participants equal and timely access to important information. That could also be a means of discouraging insider dealing.

The SFC secured its first criminal conviction for insider dealing in 2008, following that with four successful prosecutions involving nine individuals last year.

'We are extremely conscious of the need for there to be a visible response to the suspicion that insider dealing is rife in the market,' Steward said.

But while the SFC may have a positive prosecution record of late, it still has more work to do, said shareholder rights activist David Webb. 'Insider dealing remains a problem in Hong Kong and probably always will be, particularly given the difficulties that the regulator has in reaching beyond its borders,' Webb said.

Hong Kong has staked its claim as a financial hub in part on its being a stepping stone to the wider Asia-Pacific region, located within 1,600 kilometres of 10 countries. But its open borders create jurisdictional issues.

The market watchdog nevertheless triumphed in a landmark case against Du Jun, a former managing director of Morgan Stanley Asia. He was arrested after crossing from the mainland into Hong Kong and last year was sentenced to seven years in jail and fined more than HK$20 million for insider dealing.

The SFC and Hong Kong Exchanges and Clearing both scrutinise unusual trading patterns in the market. 'A price spike is the first stage,' said Steward. 'But there are still a lot of variables which need to be crossed off.'

Hong Kong may have its share of unusual stock price movements, but they are a staple of financial hubs. More than 60 per cent of Canadian mergers gave rise to unusual trading before they were announced, Bloomberg reported in 2007. And in 2006, The New York Times reported that 41 per cent of US companies that received takeover offers saw unusual trading movements.

Policing the market

The Securities and Futures Commission secured its first conviction in 2008

In 2009, successful prosecutions, involving nine people, numbered: 4