SRM Global, the hedge fund run by former UBS trader Jon Wood, today increased its stake in Northern Rock from 4 per cent to 6.17 per cent as the London Stock Exchange (LSE) took the usual step of urging traders to settle their transactions in the troubled mortgage lender’s shares.

At the same time, the Treasury Select Committee's hearing into the Northern Rock crisis continued today. Willem Buiter, a former member of the Bank of England's Monetary Policy Committee, criticised Gordon Brown, in his former role as Chancellor, for setting up the tripartite system of financial regulation in the UK.

Mr Wood’s Cayman Island-based fund increased its holding in Northern Rock last Friday – seven days before interested parties will submit bids for the bank at the end of this week.

Luqman Arnold, the former Abbey National chief executive, emerged at the weekend as a possible white knight who intends to work with current management to avoid a break-up.

Mr Wood said, when SRM Global took its initial 4 per cent stake in Northern Rock in early October, that he believed there was still value left in Northern Rock for both shareholders and bondholders.

Today, the LSE said that traders who held unsettled trades in Northern Rock shares should close their positions, some of which have been left unsettled since the end of September, when the bank’s shares went into freefall after it sought emergency funding from the Bank of England.

Northern Rock’s shares have been heavily shorted, which means that borrowed stock is sold on the expectation the price will fall and can therefore be bought back more cheaply.

In turn, this reduces the number of shares available to trade in a company.

An average FTSE 100 company may have up to 2 per cent of its stock in unsettled trades, but Northern Rock’s incomplete transactions are now in “double figures”.

The LSE will not take action against traders for failing to close their positions. But it could, for example, choose to cover the outstanding trade and then force the trader to reimburse the LSE for the cost.

The LSE can also enforce a “guaranteed settlement”, which in this case would mean a trader would have to have Northern Rock’s shares in its possession, and not lent out, before it went ahead with another transaction in the bank’s stock.

The Exchange was last forced to issue a statement urging traders to settle their positions in May 2005, involving White Nile, an oil company which had 99 per cent frozen pending a vote on whether to buy a number of Sudanese assets.

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