FSA Short Selling rules - a route to making money

FSA's headquarters, 25 The North Collonade, Canary Wharf, London, E14 5HSImage via WikipediaUnder new rules introduced by the Financial Services Authority last Friday, all short positions of more than 0.25% taken in a company during a rights issue have to be disclosed to the market by 3:30 p.m. the following day.

Widely believed to have been introduced by the FSA to assist banks during their fund raising exercises via rights issues, it has already failed to prevent the share price of HBOS failing below its right issue price. Indeed the new rules may have contributed to the fall. I make this assertion since one of the investors forced to disclose a material short position in HBOS was Harbinger Capital, who are well regarded. As a consequence, other investors may well have been prompted to follow their lead.

So, as to the title of this post. Assume you are are well-regarded fund or investor. You could benefit from a shorting a position in a company with a rights issue, having that advertised via the disclosure rules, waiting for other investors to follow your lead thus sending the price even further down and then closing your position at a profit - note the new rules only require disclosure once and so subsequent changes up/down need not be made. As a consequence, your investment "prophesy" is both fulfilled and performance achieved, thereby re-enforcing your pre-eminance as a wise investor.

Odder still is that whereas before talking down a bank stock might have gotten you in trouble with the FSA, now you can simply say nothing, short a stock which is a fairly clear signal of your views and use the FSA as your publicist.

Might this count as market abuse - better introduce another knee jerk rule change then!

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posted by John Wilson @ 12:31 PM Permanent Link newsvine reddit


At 9:05 AM, Blogger Hawkeye said...

I have to confess that I do not understand the posturing that takes place about short selling. No rule forces me to disclose a long position using margin to purchase (i.e. borrowed money or a short position in cash). Why then should I be forced to disclose a short position? As we are so often reminded by the small print. the market can go up as well as down and if I choose to take a short position it is at my own risk, why should I also let the sharks know that they may gather round if I am wrong?


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