Britain’s Financial Services Authority (FSA) has responded to recent stock market turbulence today by announcing new rules for investors who bet on big share price falls.
The FSA said it was concerned over the higher potential for market abuse through investors exploiting market uncertainty when firms are raising cash through rights issues.
Short-selling, or "shorting", is when investors borrow stock in a company and sell it in the hope of buying it back at a lower price later to return to the original owner - pocketing the difference as profit.
Smaller investors were put at risk by the practice during rights issues and it also had the potential to damage the UK market, the FSA said.
From a week today, an investor "shorting" 0.25 per cent or more of the shares in a firm carrying out a rights issue will have to tell the market.
The move is a stop-gap measure by the regulator while it considers a wider reform of the rights issue process.
Major banks such as Royal Bank of Scotland, Halifax Bank of Scotland and Bradford & Bingley are carrying out fundraising moves to strengthen their finances.
But the lengthy nature of rights issues has allowed "short-sellers" a bigger opportunity to capitalise on the turmoil, according to the FSA.
The regulator said short-selling was not "in itself" abusive but added: "It is also the case that the rights issue process provides greater scope for what might amount to market abuse, particularly in current conditions.
"We consider that, in the first instance, improving transparency of significant short selling in such shares would be a good means of preventing the potential for abuse."
HBOS - which is attempting to raise £4 billion sterling from its shareholders - has seen big swings in its share price this week.
The bank lost more than 20 per cent of its value between Monday and Wednesday - taking its stock below the "discount" price of the new shares it is offering - but has recovered much of its losses since.
According to research firm Data Explorers, nearly 7 per cent of HBOS's shares are on loan with "short" investors, compared with an average of 4.6 per cent for FTSE 100 Index firms.
Smaller investors - seen as vulnerable by the FSA as they do not usually have access to "shorting" services - account for 27 per cent of its stock.
PA