Marcus Leroux
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A ban on the short-selling of banks faced fierce criticism from some quarters of the City yesterday as regulators turned the tables on the hedge funds, leaving many scrambling to close positions that were suddenly moving against them.
The funds are concerned that the ban by regulators in Britain and the United States, as well as the Irish Republic, Australia and a host of other countries, heralds a new era in which they become an easy target for populist watchdogs and policymakers keen to be seen clamping down on what is perceived to be a predatory and parasitic industry.
The boss of one hedge fund with experience in short-selling told The Times: “My first reaction [to the ban] was disgust. I heard a quote that summed it up: capitalism on the way up, socialism on the way down. It totally undermines the concept of a free market.”
He added: “People were targeting these companies because of their balance sheets being upside down. That’s the reality.”
In a move coordinated with his American counterparts, Hector Sants, the chief executive of the Financial Services Authority (FSA), implemented a ban on the short-selling of 32 financial stocks on the London Stock Exchange on Thursday night. Short-selling is a method of betting that the price of a share will fall.
The ban means that, although existing short positions can be maintained, they cannot be increased or new shorts taken in the named stocks. Any position that is equivalent to more than 0.25 per cent of the outstanding share capital in a company will have to be publicly disclosed by September 23.
Mr Sants said that, although short-selling was legitimate, it had contributed to a “disorderly market”.
The Alternative Investment Management Association (AIMA), which represents hedge funds, attacked the plan. The industry group said that it was likely to increase the cost of capital for banks and would lead to the incorrect pricing of index products. It called for the earliest possible review of the ban, which is scheduled to expire on January 16. In a statement, it said: “AIMA is not alone in doubting whether the recent bans on short-selling of financial stocks . . . are likely to achieve the intended results over time.”
AIMA also said that it regretted that the rules had been implemented without notice or consultation.
Some industry experts feared short-sellers would turn to retail stocks with the financial sector off limits. John Godden, a hedge fund consultant with IGS Group, said: “You’re going to see shorting occurring where there’s pressure on volumes and margins in the service industries, such as retail.”
The ban was criticised by spread-betting companies, which allow individual punters to sell short, as well as the famous Mayfair hedge funds.
Simon Denham, managing director of Capital Spreads, estimates that there are more than 20,000 individuals who short-sell shares through spread-betting companies. He said: “Liquidity will now dry up in these stocks, so that any buying or selling of the affected companies will have massive ramifications on the prices.
“The problem in the markets is nothing to do with short-selling. It is to do with liquidity between banks.”
David Buik, a BGC Partners analyst, said: “Market-makers, brokers and fund managers have all contributed to the demise of these stocks. To blame it on short-sellers is totally naive.”
Jeremy Batstone-Carr, head of research for Charles Stanley, the broker, said: “Short-selling probably contributed to HBOS’s demise. But there needs to be consolidation – we have to have a clear-out,” he said.
IG Group, the largest spread-betting company, said that the new rules would have a negligible impact on its business, as less than £150,000 of IG’s total revenue of £53 million resulted from clients shorting the stock identified by the FSA.
Spread-betting companies tend to cap short-sales because they have to hedge them from their own funds, rather than using the money put down by the short-seller. This limits reliance on the practice.
It is thought that hedge funds may be among the few casualties of the buying spree that gripped markets yesterday, as they may not have been able to close short positions on time.
The FSA’s ban was mirrored by the Irish regulator. Peter O’Donovan, Paddy Power Trader’s head of financial spread-betting, said: “Short-sellers have been around for a hundred years and, following the Wall Street Crash 80 years ago, they tried to ban it. It isn’t a dirty act and it’s needed to make the market efficient. This is a reactionary move that I expect to be lifted in January – and, if it isn’t, it will fundamentally change spread-betting and derivatives.”
Although a ban of short-selling has been mooted before, it found few supporters. The FSA has preferred to strive for more information on short-sellers’ holdings. But the hedge funds are hostile to this proposal, arguing that it would require them to give up details of their strategy to rivals. The hedge funds GLG Capital Partners, Marshall Wace and Moore Capital declined to comment.
Short shrift
Shares that are no longer allowed to be sold short
Admiral Group plc
Alliance & Leicester plc
Alliance Trust plc
Arbuthnot Banking Group plc
Aviva plc
Barclays plc
Bradford & Bingley plc
Brit Insurance Holdings plc
Chesnara plc
Close Brothers Group plc
European Islamic Investment Bank plc
Friends Provident plc
HBOS plc
Highway Insurance Group plc
HSBC Holdings plc
Investec plc
Islamic Bank of Britain plc
Just Retirement Holdings plc
Legal & General Group plc
Lloyds TSB group plc
London Scottish Bank plc
Novae Group plc
Old Mutual plc
Prudential plc
Rathbone Brothers plc
Royal Bank of Scotland Group plc
RSA Insurance Group plc
Schroders plc
St James’s Place plc
Standard Chartered plc
Standard Life plc
Tawa plc
Source: Financial Services Authority
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Hedge fund shorts do no service to anyone other than themselves whilst the lenders must be stupid. The demise of a share is a foregone conclusion once they short it - who has the money to go against them? If they think a company is weak they can sell a holding or buy a put option.
Matthew, Bucks, UK
The way to bring better confidence to the market, is not to ban short selling, but to show post trade transparencey.
This was always how it operated in the past and has only changed in the last 20 years since trading has changed from floor trading to computer trading.
Martin, London, England
The attitudes expressed above in favour of Short Selling say one fundamental thing - The world of Share dealing is so Corrupt & all those within it so Corrupted that the whole capitalist financial experiment should be abandoned now. 2 forms of business owership should exist - State & Private.
Paddy, Cork, Ireland
Yep,ban short selling,but when stocks rise too fast,the next time people are making stupid money from spreading ugly rumours of how strong a stocks earnings are going to be and go long..going long is banned.I sold my property last year and rent and want to buy cheaper in 2010,well i shud be in jail
scott h, london, uk
Short selling appears to be symptomatic of a financial services market which has got above itself. without the rest of us creating things to buy and sell, it has no meaning. Since the late 70's it has been building on sand by forgetting that simple fact. Focus on the real economy and rebuild it!
Dave, Chorley,
Short selling has everything to do with the underlying state of the company. No one ever complains about people borrowing to buy shares - so why complain when people borrow to sell shares - the argument against is asymmetrical and the response equally cock-eyed - the problem goes far deeper.
Huw Sayer, London, England
theres so much rubbish talked about short selling by people who have probably never put on a trade in their lives. Only 3% of HBOS's shares were on loan when it was taken over by LloydsTSB, whilst the heaviest shorted bank in the UK ( Barclays- 5.5% of shares shorted) bought Lehman Bros. Work it out
Mike, Wirral, UK
Short sellers are doing what any business does - exploit an opportunity. Fact is if the banks weren't already vulnerable they couldn't profit. Enough of questioning their ethics. The banks need reforming; after operating irresponsibly with depositors money it is their morality in question.
JB, Seef, Bahrain
To all those who think Short Selling is a legitimate way to do business - Lend me ur houses so that I can sell them for a fair price. Then I create a scare about house prices falling - then I buy them back at a knock down price & give u back ur worthless houses.
OK which of u will b 1st in the Q?
Paddy, Cork, Ireland
Short Selling is crazy behaviour from crazy people. Where else in the world would you find someone selling something which they don't own?
Also what has gambling got to do with Ownership of Shares?
Everyone involved in these crazy gambling casinos should be locked up and the key thrown away.
Paddy, Cork, Ireland
banning short selling is purely political. short sellers dont cause the value of shares to drop, they just make a bet that the shares will drop. this is based on research into the underlying value of the stock. banning short selling is effectively the same as banning the sale of stock.
politics
will, grimsby, uk
This is taxpayers funding incompetent bankers.Banning short selling is like banning share prices falling. Might sound good to politicians and the financially illiterate.What if there was a ban on the price of oil falling?Everyone would be bleating oil was $150,when the Saudis were selling it at $95.
mark, london, UK
Surely the viability of a business is down to its liquidity as opposed to the value of its share price? If the true value of the company is greater than the level at which these short sellers are driving the price to, then there's a quick buck to be made for someone else? It's a zero sum game no?
Simon, York, England
Short selling seems to be a clear method in which a few individuals can manipulate and encourage company share prices to drop. When so much of the worlds pension and investment funds are affected by the value of these shares then either an outright ban or strict regulation may be the answer
rob, southampton, uk
Knowingly (and lets not kid ourselves) lending your depositors money to people with no hope of ever paying it back, just to earn yourself commission, is clearly fraudulent. Short selling (was) a honest legitimate trading practice indulged in quite openly. Guess which the regulators have banned?!!
Eric Skelton, Cardiff, Wales
Don't delude yourselves that the 'short selling' ban is to protect small depositors (who are insured). It is intended to stop the bonus stock options of the boardroom crooks from becoming worthless. As always, the regulators support old school cronyism against free market capitalism.
Eric Skelton, Cardiff, Wales
The issue here is not about the short selling, but rather the manipulation of the market through the inbalance of power toward the Hedge Funds
This needs to be reduced, perhaps through regulation. Alternatively, they could try to be more efficient and make money through investment for a change.
Brian C, Billericay, UK
Just make it visible.
Millie Alfred, Ronda, Spain
Without short-selling, anyone can buy a stock, but only stock-holders can sell - this makes for an inefficent and asymmetric market. With short-selling anyone can buy and anyone can sell, which makes for a more perfect market. This ban appears to be a deliberate (political?) distortion of the market
Nick, London, UK
Agree with you Daniel. Glad to see these blood suckers who get away with what appears to be blatant 'acting in concert' actions receive some retribution. Should extend ban to all stocks for same period without any notice.
E O'Donnell, Birmingham,
They should just ban it outright, how can you borrow something then sell it ? It's a scam, the attempts to justify it are self serving excuses.
john, tokyo,
This lending to all, has come to roost, how better than to use the market as a voting machine.
Sub-prime lenders & investors shouldn't be protected. Even without the Hedge funds shorting. Sub-prime will continue to get worse. AIG will once again go cap in hand, giving there last 20 % then what ?
Harjinder Rughai, Birmingham, United Kingtom
Short Selling is nothing less than conspiracy to defraud and I do not see how in any circumstances it can be legal.
Interestingly, the BBA, earlier today actually said that not only is Shorting not illegal, in certain circumstances it can be beneficial!
Alan Hargreaves, Holywell, UK
it is about time that hedge fund managers get named in the same joke with lawyers and second hand car dealers. they are the parasites of the financial world!
ip, haywards heath, UK
Yes it is naive. Shorters look for the weakest link, they can't create it from thin air, it must exist. If a share is overvalued their gamble pays off, if not then they lose their shirts. One has ask why the regulators would wish to prop up share prices which bear no resemblance to the balance sheet
Evan Owen, Harlech, Wales
Of course there are bleats from the fat cats. Short selling has nothing to do with the underlying nature of the companies and are purely a growing way to gamble and often gains made by wild and often utterl nonsense stories which are floated and designed to drive down share prices
Daniel Arbib, London, UK