British bank HBOS said today it will hand over its own detailed account of the unusual activity around its shares last week to the market watchdog to support a three-pronged probe into false market rumours.
Over £3 billion sterling was wiped off HBOS's value in less than an hour last Wednesday, which prompted an unprecedented public reaction from the Financial Services Authority (FSA) against "unfounded rumours".
Shares in HBOS have since recovered, but the FSA said it is looking at the spread of the rumours which was sometimes accompanied by short-selling among all UK banks.
"The regulator is in the driving seat on this inquiry. We're pulling together our understanding of what happened and will send that to the regulator and they will use it as they see fit," a spokesman for HBOS said.
The FSA declined to comment on individual shares but a spokeswoman said it will probably look at activity in banks going back to March 12th.
There are likely to be three strands to the inquiry: technology will be used to signal where there was unusual "short" selling; analysts will look at any further unusual trades; and the regulator will talk with market participants for insight on the dealing.
The process behind the sell-off is known as "trash and cash" - negative market rumours accompanied by short-selling of shares, which can then be bought back later at a profit. Other bank shares to be hit in the past year include Barclays and Alliance & Leicester.
No-one has been convicted in Britain of market abuse by spreading false information, and experts say prosecuting those behind the rumours will be a tough task.
But the HBOS inquiry is likely to be high-profile - Britain's biggest mortgage lender has the broadest base of UK retail investors, with over 2.1 million shareholders.
By mid-afternoon HBOS shares had rallied to 530 pence, up from Wednesday's low of 398p and more than 10 percent above their level before the sell-off.
They led a charge by Europe's banks today, inspired by a rally by US peers and news that HBOS Chief Executive Andy Hornby and other executives and managers had bought 1.4 million shares.