Late on a Friday evening in October 2008, just before 11pm, Danielle Chiesi, a consultant to the hedge fund New Castle Partners and a sometime confidant of Raj Rajaratnam, the president of the Galleon Group, another hedge fund, took a phone call at her New York apartment.

According to transcripts from an FBI wiretap, it was an executive Ms Chiesi knew from Akamai, a Massachusetts-based technology company. “Danielle,” he said, “I have a major present for you.”

Two weeks ago the present – information – and the alleged trades that followed landed Ms Chiesi, Mr Rajaratnam and Mark Kurland, New Castle’s founder, in the centre of the biggest insider-trading crackdown by US authorities since the late 1980s. All have since been released on bail.

On Thursday, US authorities cast their net wider. Nineteen individuals have now been arrested, who US authorities allege were part of an information ring passing price-sensitive secrets to hedge funds in the biggest insider trading case in 20 years.

The case against all 19 – all of whom assert their innocence – has yet to be heard, but the shockwaves from it are already being felt.

Information – the subject and object of Ms Chiesi’s October phone call – is the most valuable commodity that the $1,400bn global hedge fund industry trades in.

Where that privileged and often highly valuable information comes from is now bearing intense scrutiny.

“Information is the lifeblood of the market,” says Christopher Miller, chief executive of Allenbridge Hedginfo, the hedge fund due diligence firm. “The [Securities and Exchange Commission] is flexing its muscles. Regulators around the world want to be feared and now they’ve started frightening people.”

Such fear – or at least caution – is spreading for many because most of Galleon’s everyday way of doing business was common practice for the hedge fund industry.

The fund paid hundreds of millions of dollars a year in fees to the Wall Street banks that acted as its prime brokers. Like many other hedge funds it got market ”colour” that would not necessarily have been disclosed to regular market investors, according to people familiar with the fund.

There is nothing necessarily illegal about such practices, lawyers and brokers say. Indeed, providing colour and gossip to hedge fund clients is a normal part of everyday business, say brokers. Insider-trading, by contrast, normally involves non-public information about a very specific event, such as a merger or earnings announcement that is leaked prior to its public release by an insider and traded upon.

Many hedge funds are renowned for their information gathering.

Legendary hedge fund managers such as Steven Cohen of SAC in the US or Alan Howard of Brevan Howard in the UK are renowned for being more “plugged in” to the market – and being able to pick up on changes in sentiment or outlook faster than other participants by reading from a wealth of up-to-date information at their fingertips.

Getting extra and regular information from brokers and their analysts is not against the law so long as it remains consistent with their published public research reports.

GLG Partners, one of London’s largest funds, takes tips from analysts it rates – one from each broker – on a daily basis. The tips are stored on a database at the firm and used as a resource for its traders to tap.

On a grander scale, the hedge fund Marshall Wace uses daily share calls from hundreds of analysts to drive trading for its Trade Optimized Portfolio System (Tops) fund.

The fund receives up to 900 trading ideas a day in London alone – submitted via an online portal by brokers, analysts and salespeople at the city’s trading houses. It then uses computer algorithms to sort, grade, and derive trading themes from the advice.

At its peak in 2006, Tops alone was estimated to have accounted for 2-3 per cent of daily trading on Europe’s stock markets.

Lansdowne Partners, one of the most successful hedge funds to have emerged from the credit crisis, meanwhile owed at least a small part of its trading edge to focus groups it used to try and gauge consumers’ views of UK banks.

Others use more esoteric approaches. Man Group, the world’s largest hedge fund company, established a research institute with Oxford university in 2007 to help develop cutting-edge ideas to trade with. Research at the institute has ranged from modelling techniques used in computer game graphics to artificial intelligence.

The arrangement means “sharing ideas with some of the most prominent quantitative finance academics in seminars, in the halls and by the watercooler,” said a person at the firm. “We have to innovate or die.”

Winton Capital – another highly-successful computer-driven trader – recently had 300 years of commodity price data added to its vast computer mainframe.

The data first had to be translated. In its original guise, it was written – or rather carved – in Babylonic cuneiform.