The Financial Services Authority has decided to lift the ban on short-selling it introduced last September – much to the delight of City traders, but to the evident dismay of the various politicians who have been lining up to demand an extension. The rule was brought in to stop hedge funds (and their ilk) driving down the share price of our ailing banks, notably HBOS – but given that the FSA found no evidence whatsoever of market manipulation in that case, the case for the ban wasn't entirely obvious...
Short-selling – when a fund borrows a pile of shares it doesn’t own and sells them in the expectation that the price will fall, allowing it to buy them back at a cheaper price – got the blame for much of the disruption in the equity markets this summer. And it’s presumably true that it made things worse – as confidence in the banks tumbled, taking their share prices with it, short-selling made these falls even more precipitous than they would have been anyway. And given that the markets are still pretty volatile, many people (including Lib Dem sage Vince Cable) have been arguing that it made sense to extend the ban beyond its January expiry date.
However, the fact remains that short-selling plays a useful role in financial markets, because it acts as a brake on excessively exuberant share price rises (if you can still remember such things). Indeed many in the Square Mile felt that the reasons for the ban were political rather than financial – i.e. it was a good excuse for MPs to give the City a good kicking – particularly since several studies have suggested it made absolutely no difference to the volatility of banks’ share prices. After all, there were perfectly good reasons for banking investors to be selling their shares as rapidly as possible, as it turned out...
But the hedgies won’t have it all their own way. Although the ban has been lifted, the FSA has reserved the right to bring it back in, without consultation, whenever it deems it necessary in the future. This should discourage any unscrupulous traders from playing fast and loose with the rules. And the new disclosure rules, which require funds to reveal any significant short position (more than 0.25% of a company’s market value), will remain in place for another six months. The FSA’s Sally Dewar said this will ‘reduce the potential for abusive behaviour and disorderly markets’ – in other words, greater transparency will hopefully lead to better behaviour...
In today's bulletin:
Debenhams and Next see sales fall - and their shares rise
House prices fell at record rate in 2008
FSA lifts controversial ban on shorts
Editor's blog: Down with detox
SMEs still surprisingly perky about 2009