January’s end to the U.K. prohibition on the short-selling of 34 financial stocks only triggered new speculation — about the effectiveness of the ban.
“It interfered with the workings of the market by limiting price discovery, reducing liquidity and potentially creating an artificial market,” argues Andrew Baker, CEO of the Alternative Investment Management Association in London. The rule was meant to dampen the share-price drops that helped trigger the demise of some of the U.K.’s biggest financial institutions, including HBOS and Royal Bank of Scotland, now majority-owned by the government. Both lost a quarter of their market value in the four days before the Financial Services Authority imposed the ban.
Critics continue to dispute the usefulness of the rule; the FSA says it will reimpose it if necessary. An immediate return to previous levels of financial-sector stock shorting is unlikely simply because the prospect of further bailouts may well drive bank stocks up.
“If one day you wake up and the government has bought up all the bad assets from the leading banks, you will see your short position go through the roof,” says Ken Murray, chairman of Blue Planet Investment Management, a Malta-based investment manager specializing in financial stocks.
