Making bets on falling bank stocks is to be outlawed for the time being - following several turbulent days on the markets.
Short selling of financial stocks will be banned due to "exceptional" circumstances, the Financial Services Authority (FSA) said yesterday.
The City watchdog is cracking down on the practice as a result of the extreme volatility seen in the financial markets in recent weeks.
Short selling has apparently become common practice among investors and investing institutions, such as hedge funds. It has been alleged that groups of investors had been aggressively "shorting" HBOS stock - and were therefore a major factor behind the lender's £12.2 billion takeover by Lloyds TSB yesterday.
"Shorters" bet on the price of a certain share going down by borrowing some stock (and paying a fee to its owner for doing so), selling it on, and then buying it back later. The stock is then handed back to its owner. If the bet is successful and the stock price has dropped, the shorter profits thanks to the difference between these prices.
While the ban on short selling might have a steadying effect on stock markets - which endured some of the worst one-day drops since 9/11 this week - it might not be welcomed by large investors such as pension funds.
This is because these institutions provided many of the shares borrowed by the shorters - and will therefore be missing out on earning fees on the practice.
HBOS stock declined over 75 percent from the beginning of 2008 before the takeover deal was announced this week.
FSA Chairman Callum McCarthy said: "This is a measure which reflects the present turbulence in markets. It is designed to have a calming effect - something which the equity markets for financial firms badly need."
