FSA ENDS U.K. SHORT-SELLING BAN; AFFECTED SECURITIES WERE WEAKENED, LSE SAYS

Posted January 6, 2009

LONDON – The Financial Services Authority has lifted the temporary ban on short-selling certain financial securities in the UK that began September 19, 2008. The change leads to a clear framework for disclosure, according to a regulation executive at the London Stock Exchange (LSE).

“Short selling has become an emotive subject, because its potential misuse is more readily understood than the variety of constructive reasons why a market participant might sell stock it doesn’t own,” says Adam Kinsley, Director of Regulation, LSE. “Our research suggests that the ban on short selling did in fact impair liquidity provision and market quality in affected securities – this increases the cost of investing in equities. The FSA has reviewed the impact of its temporary short selling measures, and should be applauded for its balanced approach and proposals.”

Research by the Capital Markets Cooperative Research Centre found a market weakening in the liquidity of securities in which short selling was prohibited. The research compared liquidity in 15 FTSE 100 financial sector stocks in which short-selling was prohibited with a control group of 78 FTSE 100 securities in which short selling was not prohibited, during 30 trading days prior to and after the implementation of the short-selling ban.

While there was a market-wide decline in liquidity during the period of the study, its findings suggest that the stocks included in the short-selling ban were more severely impacted, with the 15 FTSE 100 financial sector securities covered by the ban suffering a widening in spreads 150 percent greater than was observed in a control sample of the remaining, unaffected FTSE 100 securities.