Short Selling

The fact that the USA, UK and Japan have put short selling bans into play should not be seen as a long term solution to control the markets. The UK has set the ban until the 29th January and restricted it to 29 financial stocks although all types of company are exposed to manipulation by short selling.

Short selling did not create the current credit crisis but it is being used by some very unscrupulous individuals and banks to manipulate the share prices that are bring down the great and the good in the market.

No more fine banking institutions should be murdered because of the ability of the few to use the many short selling derivatives instruments to create a false market. The practice of causing a false market is illegal but over the last decade we have witnessed an explosion of hedge funds and other instruments able to increase the volatility of share prices to make fast money.

The complexity of these financial instruments dumbfounds the boards of banks and even more worryingly the regulators. The result is that banks with good business but which are vulnerable in the credit crisis are being brought to their knees.

Of course Lloyds TSB has been a beneficiary, with the purchase of HBOS at a cheaper price, aided by the Government which is in a corner and desperate to bring order back into the financial markets. However, for the majority of financial firms and their investors the ability to manipulate the share price in a market in turmoil is a dangerous and terminal activity. 

The truth about short selling is that it is a fundamental requirement of the market to create liquidity and the possibility to make profits but has been wildly misused and been allowed to grow without regulatory control. The short selling ban is only a short term remedy for a disaster scenario and it will return sooner rather than later. Hopefully the return will include more control measures and regulatory monitoring to enable the banking system to take any necessary action. In the meantime the long term resolution to the credit crisis needs attention and confidence between banks is a key building block on the way back to normality.