Short-selling of financial stocks was banned in Britain on Thursday, in a desperate effort by the City watchdog to shore up the stricken financial system. The ban, announced by the FSA watchdog body in a surprise move Thursday night, will prevent investors from creating or adding to short positions in banks, insurers and other financial companies. Short-sellers – particularly hedge funds – who profit from falling prices have been blamed for the plunging shares of HBOS and other banks. The new rules boosted UK bank shares traded in New York, with most jumping more than 10% within minutes of the announcement and Barclays rising more than 20%. Traders said the ban was likely to drive a relief rally in financial shares on Friday, which coincides with a so-called “triple witching hour” when large numbers of options expire. However, hedge funds warned that by making it impossible to hedge investment risk during a rights issue or placing, the rules would push up banks’ capital-raising costs. Separately, the FT reports that US regulators were on Thursday night considering a ban on short selling among steps to restore calm to markets. Meanwhile, New York attorney-general Andrew Cuomo announced a probe into short-selling of shares in Morgan Stanley, Goldman Sachs, Lehman Brothers and AIG, which have been pummelled in recent days.

This entry was posted by Gwen Robinson on Friday, September 19th, 2008 at 5:40 and is filed under Capital markets. Edit this entry.