| FSA forum okays controversial 'short selling' practice |
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| 16/09/2002 | |
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by Nat Mankelow The Financial Services Authority (FSA) has said that the controversial practice of short selling – where traders sell shares that they do not own in the hope that they can be bought at a cheaper price at a later date – does improve the liquidity of UK markets, however greater transparency and disclosure is required in the future. Following a roundtable discussion hosted by the FSA and attended by hedge funds, prime brokers and several corporates, Howard Davies, FSA chairman, said, "The practice of short selling has been the subject of much debate this summer. This is despite the fact that many market participants tell us they believe there is actually less overall short selling in this bear cycle than there had been in the recent bull cycle. Not surprisingly, people tend to be much more concerned about short selling in a bear market." Davies said that the FSA views short selling just like any other investment activity, "and not as an abusive activity unless used as part of an abusive strategy – I have said before, we have not so far seen a persuasive case for restrictions, or a prohibition, on short selling," he said. However, critics of short selling have labelled the practice as aggressive and potentially damaging to the health of the financial sector. Industry experts identified a massive spate of short selling by hedge funds as the main cause of the collapse in Marconi's market value earlier this year. More than 160m shares went through the market at one point to leave the share price at 29p. Roundtable The FSA roundtable looked at possible disclosure options available for the short selling market, which included publishing Crest stock borrowing figures, or some more refined data, "as the closest proxy for short selling". In addition, all short sales in the cash equity market could be marked and information disclosed to the market. This option has been pursued in other jurisdictions such as in the US and Hong Kong, said the FSA, however, it may capture only a limited picture of short selling in UK circumstances and might have the effect of displacing short selling activity into other instruments. "The FSA will seek to identify a measure of disclosure that achieves the right balance between cost and utility through its discussions with market participants, discussions at the roundtable and from feedback to the upcoming discussion paper," concluded Davies. A discussion paper is due for publication by the FSA in the autumn. |
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