Plea for ban on short selling to be extended

Published on Saturday 20 September 2008 14:54

THE regulator's ban on short selling of financial stocks should be extended to other sectors, including commercial property and retail, to avoid dramatic slumps in their shares, according to a property trade body.

The Financial Services Authority (FSA) last week banned short sellers from targeting financial stocks.

They sell borrowed stock in the hope its price will fall, allowing them to buy it back more cheaply.

This followed the meltdown in the share price of a number of banks, most notably HBOS before its takeover by Lloyds TSB, last week. The FSA said it may extend the ban to other sectors if required.

Reita – a trade body for real estate investment trusts – has now called for short selling to be stopped in the commercial property and real estate sector.

Dave Butler, Reita head of external affairs, said a ban would help address market volatility.

In its Investment Perspective report published last month, 60% of property industry leaders said they felt volatility caused by shorting was a serious issue.

Butler said: "This has been reinforced by comments from a number of analysts that the financial sector ban could tempt short sellers to seek opportunities in the property sector."

Reita described short selling in the commercial property sector as being at the root of the current "unprecedented" volatility.

It said the property sector is not very liquid, especially among small and mid-cap companies, and volatility is unsettling in the short term.

Analysts have also warned that hedge funds are likely to increase their short exposure to retail stocks.

The retail sector was already the most shorted sector, even before the ban on financials, according to research firm Dataexplorers.com.

And CMC Markets, a global online trader which allows investors to trade on a financial market or product through spread betting, has stopped clients "going short" on financial stocks since the FSA's ban.

Investors will no longer be able to bet on the price of a financial instrument in that sector dropping in value.

A CMC Markets spokesman said: "Although it's up to our clients to adhere to the FSA's ban, we will no longer be letting investors go short on UK financial stocks."

He added that the ban does not have massive implications for CMC as investors have tended to be more comfortable with "going long", and betting on the share price going on up.