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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