Charges of illegal insider trading by two 27-year-old Wall Street arbitrageurs yesterday rekindled the controversy over the role of these professional speculators.

Several years ago, arbitrageurs primarily invested in the stocks of companies that were the targets of announced takeover bids. By purchasing stocks after takeover offers were announced but before the deals were completed, the "arbs" essentially bet on the outcome of proposed mergers.

But the recent wave of takeovers left many wealthy arbs with so much cash and confidence that they began to speculate in the stocks of some companies before takeover bids were announced. Their aggressive purchases of takeover stocks only days or hours before offers were announced have raised questions about how often arbs trade illegally on the basis of confidential information.

The two arbs accused of illegal trading on the basis of confidential information are Andrew Solomon of Marcus Schloss & Co. and Robert Salsbury of Drexel Burnham Lambert Inc. Both are accused of using inside information to make stock-trading profits for their employers rather than for their personal accounts.

Wall Street sources familiar with the cases said the charges against these individuals who did not personally trade, but who allegedly passed along confidential information, are part of an effort to halt the improper flow of inside information on Wall Street. They said the government is trying to discourage the passing of information by making examples of these individuals.

"They are trying to say that you don't have to personally profit to be criminally liable -- you just have to pass the information along," one Wall Street source said. "The use of such information by [the recipient of a tip] to induce actions by others is a common [takeover] tactic."

Investment bankers and takeover lawyers, who are constantly in possession of confidential data about upcoming deals, often trade information about deals with arbs. In addition to the mutual benefit that comes through exchanging information, investment bankers sometimes discuss deals with arbs to make them part of the takeover process.

They do this by encouraging the arbs to buy the stock of a company that is about to become the target of a takeover. The greater the percentage of a company's stock that is held by Wall Street's arbs, the more unstable the situation is, and the more likely it is that the company will be acquired. Investment bankers, who earn fees by organizing takeovers, can increase the likelihood they will earn a fee by encouraging arbs to purchase shares.

Major Wall Street firms such as Merrill Lynch and Salomon Brothers have arbitrage departments that speculate on takeovers. In addition, there are many independent arbitrageurs. The best known independent arb is Ivan Boesky. Some aggressive arbs hire detectives to track the movement of investment bankers and corporate executives involved in takeovers, while others primarily buy stocks of companies that are involved in publicly announced deals.

The economic argument in support of the arbs is that they are willing to assume the risk that a takeover may fall through. For example, if a takeover bid is announced at a premium price, individual investors with a profit in the stock may be happy to sell. Arbs purchase these shares, hoping to profit on the small difference between the stock price when the bid is announced and its ultimate price when the deal is completed. If the takeover falls apart, they may suffer heavy losses.