Europe’s second-largest hedge fund yesterday mistakenly exposed its large-scale shorting of shares in Northern Rock, the troubled bank, after a miscommunication with the Takeover Panel.

GLG Partners, a $19 billion (£9 billion) fund manager with Sir Howard Davies, the former Financial Services Authority chairman, on its advisory board, yesterday told the London Stock Exchange that it had failed to make trading disclosures between September 26 and October 5.

The hedge fund manager blamed “human error” for its lapse and disclosed that it held short positions on more than 3 per cent of Northern Rock stock via contracts for difference. It is thought that up to 50 per cent of Rock’s stock is currently being shorted.

Shorting involves the borrowing of shares and immediately selling them in the hope the shareprice will subsequently fall. When the price falls, the speculator buys the shares back and returns them. The profit is made in the difference between the price of the shares when they are sold, and when they are bought back more cheaply, minus the cost of borrowing.

In a farcical series of events, it is understood that GLG told the Takeover Panel of its activities on Monday night and that the Panel told it to alert the market as soon as possible.

Yesterday it emerged that GLG had not needed to reveal its activities. The Panel was yesterday expected to admit its error to the fund manager.

Northern Rock has been under the Panel’s jurisdiction since September 25, when the bank said it had received approaches that could lead to an offer for all or part of it. Under the Takeover Code, investors with interests of 1 per cent or more in a company must disclose their trading of its shares during an offer period.

Because GLG did not hold a long position of 1 per cent or more, no disclosure was required.

Short positions need not be disclosed.

Regulators have been jumpy about trading in bank shares during recent market turmoil, amid fears of insider dealing.

Philip Richards, a co-founder of RAB Capital and the biggest shareholder in Rock, last month attacked some rival hedge funds for fomenting panic about Rock and accused the Financial Services Authority (FSA) of failing to regulate trading in its shares.

The FSA has taken just one notable disciplinary action against market abuse.

In August 2006 it fined GLG and Philippe Jabre, the former managing partner, £750,000.

GLG has also been fined by French and American regulators in the past 14 months.

The Bank of England yesterday eased a sale of Rock, by relaxing the types of security it will accept in return for the unlimited emergency credit it extended to the bank.

Rock has borrowed £10 billion from the Bank since September 14, when it emerged that it could no longer raise funding in the interbank market.

Banks such as Citigroup, which has agreed to lend Rock £10 billion, have struggled to finalise terms of their lending because Rock’s mortgage assets had been handed over to the Bank.

Yesterday the Chancellor said that the Bank would accept all of Rock’s assets as security. The Chancellor also extended the state guarantee to all retail deposits held by Rock.

The bank will pay a percentage of new deposits in return for the improved protection of customers.

Mervyn King, the Bank’s Governor, yesterday called for reforms, including new laws, to help to prevent a repeat of the Rock debacle as he set out lessons from the affair.

Mr King said that, as well as a more generous system to guarantee more of bank depositors’ funds, a new insolvency law for banks should be passed to give depositors more certainty of protection.

This would ring-fence money owed to retail depositors in the event of a bank running into trouble.

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