In an unexpected move, the Financial Services Authority (FSA) has introduced a new provision in the code of market conduct requiring disclosure of net short positions in stocks undergoing rights issues of positions of 0.25%. The move, which took place on 20 June, was widely seen as an attempt to crack down on the manipulation of market prices and to introduce some stability in the market. Investment banks welcomed the announcement but hedge funds and their legal advisers were vocal in their anger at the move. On 16 July, the Securities and Exchange Commission (SEC) in the US announced a similar provision to take effect on 21 July.
Short sellers borrow stock to sell, in the expectation of the price dropping when the stock can be bought back at a lower price. They have been the subject of criticism by certain sectors of the market. The rise in shorting has been fuelled by the growth of hedge funds: it has been suggested that short selling accounts for 40% of the $3,000bn held in hedge funds. Lehman Brothers has blamed the sharp fall in its share price upon an orchestrated campaign by short sellers. However, as many financial analysts point out, short selling provides liquidity, identifies and forces down overpriced securities and is said to generally increase the efficiency of the market. The FSA accepts the role of short sellers, maintaining that this rule change simply introduces greater transparency into the market. The SEC maintains that its focus is on naked short sellers and is an attempt to better regulate the market.
