The novelty in Dublin this week is the suspicion that short sellers are going to illegal lengths to make killings, writes Laura Slattery

RATIONAL BEHAVIOUR and stock markets have never been comfortable bedfellows, but the pre-Easter soap opera of malicious rumour mills, "absolute fantasy" and "irrational" double-digit dips in share prices has generated a whole year's worth of shouty, sweaty trading-floor pictures in one week alone.

In Dublin, the gossip swirled around the company judged to be the most vulnerable to property markets: Anglo Irish Bank.

The stock celebrated St Patrick's Day by taking an impromptu 15 per cent plunge: there was no profit warning, no change in management, no horrors emerging from its balance sheet, and no emergency application for liquidity injections that we know of.

The bank, eerily like HBOS in London two days later, came undone as a result of mere rumour.

"So, what's new?" a seasoned market-watcher will probably ask.

The first unusual thing about the week's events is the scale of the mid-session volatility, known as the intraday movements.

Wild swings in Anglo's share price continued during the week even though the stock's closing prices exhibited signs of recovery. Yesterday, Anglo made a convincing bounce, closing up almost 14 per cent. But at €7.85 it is still down 55 per cent on its peak last June, when it was trading at €17.53.

But the real novelty is the suspicion that short sellers are now going to illegal lengths to make their killings.

Short selling is where investors bet that the price of a share will fall, instead of adopting the traditional approach of backing winners. There can be much to gain by undermining market confidence but doing so deliberately breaches market abuse laws.

On Wednesday morning, HBOS shares dived almost 20 per cent after false rumours were spread that its senior executives were heading in the direction of Threadneedle Street to seek a Bank of England handout. The plummet was swiftly followed by an unprecedented announcement from the UK Financial Services Authority that it would investigate the rumour-mongers.

The Anglo rumours included the suggestion that the bank was suffering large-scale withdrawals by its commercial depositors and that some institutional investors were offloading their stakes. Dealers said they didn't believe that Anglo was any way in trouble.

Analysts have complained that the stock, like most of the rest of the Iseq, has been unfairly dumped in international fund managers' black books, while short sellers were "whacking it down".

The financial regulator here is now mounting its own investigation into "false and misleading" rumours connected to "unusual trading patterns" in Irish shares.

Contrived chaos is the last thing the Dublin market needs: it has already suffered enough. Since its closing value peak on February 20th, 2007, the Iseq index has tumbled 38 per cent in value.

Even taking the Republic's slowing economy into account, the inexorable decline of Irish stocks has been "way overdone", according to exasperated analysts.

Unlike other markets, the credit crunch was not the initial trigger for the Iseq's slide. Fears about the contracting housing market were already undermining equity values last spring. In the sense that the unwinding started in the "real economy" (as opposed to the unreal world of share price over-valuations and market exuberance), the problems were similar to those that later hit the rest of the world on a grander scale.

The index is dominated by a handful of banks, plus the building materials firm CRH. This has intensified its volatility and made anything with the Ireland label an easy "sell" for international investors and an easy target for the short-selling hedge funds. Overseas institutions simply don't care that the stocks are now trading at their lowest price/earnings ratios since the early 1980s.

By starting its fall from grace six months earlier, the Iseq's year-on-year losses are steeper than elsewhere. However, for those who can remember that far back, its gains in the preceding years also outstripped those enjoyed by many of its European counterparts. Bursting bubble, anyone?