FSA to lift ban on short selling

The Financial Services Authority (FSA) says it will lift a ban on short selling stocks in 34 companies in the UK banking and insurance sector, on 16th January.

The ban was introduced as a temporary measure in September of last year, when short selling was blamed for a downward spiral in HBOS’s share price, the driving force behind its hasty merger with Lloyds TSB.

The practice involves traders selling stock they do not own in the expectation that the price of the stock will fall, allowing the trader to buy the shares back at a lower price.

The profit is the difference between the initial selling price and the subsequent purchase price.

Short selling is regarded by regulators as a legitimate investment technique although MPs have been calling for an extension of the ban while markets remain volatile.

By way of compromise, the FSA is retaining rules that demand the disclosure of significant “short” positions until June 30.

The FSA’s managing director of wholesale and institutional markets, Sally Dewar, explains that continuing the disclosure obligations will reduce the potential for abusive behaviour and disorderly markets.

However, the watchdog has issued assurances that it will reinstate the ban if the need emerges.

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