The Financial Services Authority in the UK and the Securities and Exchange Commission in the US have placed temporary bans on short selling of publicly traded financial companies in response to growing turmoil in the financial sector.
The FSA moratorium will remain in effect until 16 January, although it will be reviewed in 30 days.
“While we still regard short-selling as a legitimate investment technique in normal market conditions, the current extreme circumstances have given rise to disorderly markets,” says Hector Sants, FSA chief exectuive. “As a result, we have taken this decisive action, after careful consideration, to protect the fundamental integrity and quality of markets and to guard against further instability in the financial sector.”
The SEC’s ban affects 799 financial companies and will last until 2 October, although it could be extended further.
“This action, which would not be necessary in a well-functioning market, is temporary in nature and part of the comprehensive set of steps being taken by the Federal Reserve, the Treasury, and the Congress,” says Christopher Cox, SEC chairman.
The Alternative Investment Management Association has spoken out against bans on short selling, which it says are necessary in maintaining efficient, liquid markets with accurate price discovery and are not the cause of recent market conditions.
“The true cause appears to be a widespread lack of confidence by all investors in financial markets related to much deeper market issues,” says Florence Lombard, chief executive of AIMA. “These issues include excessive lending practices by banks and an inflated property market on both sides of the Atlantic. We once again recommend that markets are looked at in their entirety and that any review should include all relevant players within these markets, not just hedge funds.”