Citigroup is being charged with insider trading in Australia for feverishly buying shares in Patrick Corp. (which loads and unloads ships) the day before Toll Holdings (which moves stuff around on trucks, trains, and ships) announced an unfriendly takeover bid for Patrick. Citi’s investment bankers were advising Toll in its raid, so Australian regulators allege that its proprietary traders must have partaken of inside information.

I’m more or less willing to believe Citi’s defense, as elucidated in the Financial Times, which is that rumors about the bid were already flying around Sydney, so it would have been even more suspicious if Citi had stopped trading Patrick shares. A “Chinese wall” separates Citi’s traders and investment bankers, so the traders must have heard the rumors elsewhere.

But the Australian regulators, who apparently want to make it illegal for investment banks to trade in the shares of companies that they’re advising, have highlighted something highly iffy about how these firms now make their money. As Citi put it in a statement quoted in the AP story about the case (but different from the one I found on the bank’s Australia website), the charges are “an attempt to regulate the proprietary trading desks which are a feature of all major investment banks.”

Proprietary trading is actually not just a feature but the most profitable one for most investment banks these days. And there’s really no way to explain this sustained profitability other than that traders at the big investment banks have access to information that those on the other side of the trades don’t. If the banks’ compliance people are any good, none of this is technically insider trading: Traders at Goldman or Merrill aren’t getting directly tipped off by the M&A dealmakers at their firms. But the traders are taking every other possible advantage of their position at the center of lots of different deals for lots of different customers.

I’ve explored this in a couple of different Fortune articles, but I don’t think I’m anywhere close to really understanding what really goes on. It strikes me as a clear conflict of interest to make a big trade for a client while at the same time squeezing bits of extra profit out of proprietary trading because the traders know something that the client doesn’t. But it’s a conflict of interest that is (a) not illegal and (b) helps ensure that there are highly paid people and well-funded institutions around to keep securities trading smoothly. Somehow I think Goldman, Morgan Stanley, Merrill, Citigroup, et. al. are getting the sweeter end of this deal (and driving up the price of Manhattan real estate in the process). But I’m not at all convinced that there’s a better way.