FSA bans short selling of financial stocks

by Gill Montia

Story link: FSA bans short selling of financial stocks

The Financial Services Authority (FSA) has banned the short selling of financial stocks.

The practice has been blamed for the downward spiral in HBOS’s share price at the beginning of this week.

The decline only ended when it was announced that the bank was merging with Lloyds TSB.

Short selling is regarded by regulators as a legitimate investment technique.

It involves traders selling stock which 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.

According to FSA chief executive, Hector Sants, there is a danger that short selling during the current financial crisis has given rise to disorderly markets.

The ban has been applied until January of next year, although it will be reviewed in one month.

It aims to increase confidence in the financial markets and encouraging banks to lend to one another.

Regulators in the US are also investigating short selling and its links to the struggles of investment banks, Goldman Sachs and Morgan Stanley, both of which have seen share prices plummet this week.