Markets surge after crackdown
THE FTSE 100 rallied by 6% in early trading as a ban by regulators to stop speculators profiting from falling share prices in the current market turmoil came into force today.
Under the Financial Services Authority’s clampdown, traders are not allowed to bet on share prices falling in listed financial companies - a practice known as “short-selling”.
Some have seen the tactic as a factor in Halifax Bank of Scotland being forced to seek a takeover by Lloyds TSB.
The watchdog will also require all investors “shorting” more than 0.25% of a financial company’s shares to reveal their positions next Tuesday.
Short-selling is when investors borrow stocks in a company to sell it, hoping to buy it back at a cheaper price later on and return it, pocketing the difference as profit.
Gary Fawcett, assistant director at investment manager Brewin Dolphin, believes the move will add much-needed stability to an ailing financial sector.
He said: “Short-selling is a legitimate tool in normal market conditions. But we are not operating in normal market conditions. HBOS would have had much better chance of remaining an independent entity had it not been for short selling, which played a part in pushing down its share price and damaging confidence.”
Financial Services Authority chief executive Hector Sants said: “While we still regard short-selling as a legitimate investment technique in normal market conditions, the current extreme circumstances have given rise to disorderly markets.”
Anyone can short a position in a company’s shares, but typically hedge funds are the main players.
Early trading in the City suggests the temporary ban has helped to restore confidence to a battered financial sector.
Shares in HBOS, which was forced to agree a £12bn takeover from Lloyds TSB yesterday, jumped 28% earlier today while its proposed new owner’s shares soared by 43%.
Meanwhile, Barclays shares rose by one third and shares in FTSE 250 bank Bradford and Bingley were up by 72%.
Market confidence has also been boosted by plans by US Treasury Secretary Hank Paulson to rescue banks from the “toxic” assets that have led to the crisis. Under the plans, a government agency could be established to take on the debt.
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