Ok this may be long, but spying is a topic I am quite interested to discuss, and actually wanted to start this very post myself. Too bad Indirik reads my mind.
In a broader sense I agree with Lilwolf. Spying is bad because it considerably reduces the spread of informations in a realm, and having informations is something that makes bm fun. Having been for 3 years in Sirion at war as Marshal then General then Ruler in a realm that constantly had more than 100 players and even 150 sometimes it was imperative to keep things restricted, and even if I always struggled against the spy paranoia to actually broaden military stuff a bit, it was a fact that constantly every time the councils got bigger, leak was always present. This means that in Sirion all the time around 10% of the realm was aware of what was going on. Often even less.
On the other hand spying can be fun and realistic. Again going back to my Sirion experience I must say that giving different orders to the whole armies/loyal knights, discussing plan A within the council and then going for plan B planned only with some few people and things like that in order to confuse and expose spies has been very funny and gave a taste of real war so to say. The risk of leak gives to the whole planning and discussing phase a thrill coming from the additional cleverness required that is quite amusing in my opinion. On top of that spying gives a concrete chance to all nobles, regardless of their hierarchical position, to actually influence a war. Thus it forces rulers to be extra careful: a war declared for a whim is almost certainly disapproved by someone in your realm, and that can turn him into a spy. Realms internally split are thus even weaker than a cohesive counterpart.
The true downside of spying is the rather elevate chance not to be catch at all. There is no price to pay for being a spy whatsoever. You can spy and then be a good noble at the same time, going for a reward either realm wins, no risks at all. This spoils a bit the complexity of the spy phenomenon making it a cheap way to win, and increasing even more its social consequences that are the close mindedness of the realm with respect to newcomers and the scarce spread of information to the nobility. Were there a way for, so to say, rulers and judges to actually have a chance to catch a spy that would truly improve this side of the game, for instance forcing spies to be smart and not giving away some informations for the sake of remaining hidden and keep their cover or perhaps forcing them to spend some time in the realm loyally to gain the trust of the leaders - that would perhaps remain focused on newcomers or troublemakers.
This is more or less my point of view on spying in general. Going to more concrete cases connected to Indirik's questions once again I put forward two spy cases I ran into during my experience (again, in Sirion.)
The first one was back when Sirion was attacked by Fontan, SoA, Westmoor Perdan and OI all together. As some of you may know, a guild for purpose of organizing their huge armies was created in Ashfort and, needless to say, there was a spy into it. Many were aware of that already, because the spy was just the son (or brother? or whatever) of the ruler of Old rancagua, killed by SoA in Pedrera before their realm was wiped out. He disliked SoA, opposed the entrance of Perdan in the war and then spied in order to help Sirion. I would call these IC reasons, especially because the Perdan leadership was quite aware of his legacy, and could have excluded him from the operations on this basis perfectly. In addition, he just reported some broad strategic talk, and not day by day orders by choice, in order not to ruin the game too much - something I approved.
This is a kind of spying in my opinion that is fine and tolerable.
The second one happened recently. A character joined SoA and soon became a Marshal there, and the very same day this char joined SoA a new noble joined Sirion. To make the long story short, they somehow knew each other and the sirion guy started to spy for the soa one, almost immediately after his joining. We first knew there was a spy and took some time to discover who he was, and this was around when he was in sirion since one month more or less, meaning he has been spying from almost the very first day he joined Sirion. I have no idea what kind of IC deal could have been between these chars, but the coincidence joining of two realms at war coupled with the unknown heritage of the sirion one lead me to frown upon the robustness of their ic connections. Clearly what was reported were only day by day orders, nothing else.
This is kind of spying that greatly ruins the game in my opinion, because leads people in charge to doubt about everyone, and invites them to leave armies as clueless as possible about what is going on.
So, in conclusion, to answer Indirik's questions:
1- I don't know. Sometimes yes, sometimes no. If spies could be catch it would definitely be a yes.
2- yes almost every time. I liked dwilight because the lack of hate and the one-char limit led to a less suspicious situation. Now it's no longer like that even there.
3- yes. several times risky moves were not done because of the suspicious of spies. On the other hand sometimes misleading orders to the spy were sent on purpose to actually gain something from it
4- as I said, no. I personally don't like even the IC approach to it, that would be asking a realm mate of yours who is bored of the realm or maybe a member of a failed rebellion to come along with you to a certain continent and start a spy network just for the sake of becoming more powerful there quickly.
cheers and sorry for the length.