In what amounts to an egregious manipulation of the free market, UK regulators bar short-selling on financial stocks.
So called short selling is a method to make money even on stocks that are heading down. Most people think of the stock market as working basically like this: You have hunch a company is going to do well, so you simply buy the stock, hold it for a while, and hope to sell it at a later date for more than you spent to buy it. This is called "going long". Of course this only works for firms that are actually going up.
But there is a way to make money even on companies you believe will fall in value. Basically what you do is go to someone, a fund or broker, who sits on a cache of the stock in question. You then ask to borrow the stock for a while, for some fee, and sell it right away. Now, if you were right, and the stock really falls in value, you can then buy back the stock at some later date, at a lower price, and give it back, while pocketing the difference. This is usually reffered to as "going short".
Yesterday the US regulators stepped in and put some curbs on how short selling is done, nixing so called "naked" short selling, where you sell stock you don't really have on hand. So far so good.
But the British Financial Services Authority (FSA) today went beyond that, and into what can only be called blatant market manipulation. They simply outright banned short selling of financial sector stocks
alltogether. These stocks are now only allowed to go up.
Hector Sants, the chief executive of the FSA, said: "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.
"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."
This measure is said to be a temporary measure due to the financial crisis set off by the credit crunch that has gripped US and world markets in the wake of the sub-prime and bad debt implosion. But the precedent is set, and a dangerous precedent at that. Already there is talk of extending this short selling ban to all
sectors of the stock market.
It is quite a spectacle to watch these self proclaimed "Masters of the Universe", staunch defenders of the unrestrained Free Market when times are good, go sobbing to the authorities to protect them against the awful market when things are headed south. It also, in the long run, puts a real dent in the credibility of The City of London as a fair and free nexus of global finance.