A Birmingham stockbroker said aggressive hedge fund tactics would have to stop as the Financial Services Authority said it would be lifting the ban on controversial “short-selling”.
Lawrence Fagg, the head of the Birmingham branch of stockbrokers Charles Stanley, said short-selling – which had been blamed for causing chaos in the financial market – was a legitimate tactic, but had become a problem because too many investors had pushed the market too hard in search of high returns.
Yesterday, the Financial Services Authority (FSA) said it would be lifting the ban on short-selling on January 16, despite calls for an extension from MPs.
Short-selling came under fire and was banned for 34 financial stocks in September last year because of the financial turmoil in the market. Short-selling had been blamed for causing huge drops in the value of banks after rumours circulated they were in financial difficulty.
Mr Fagg said short-selling had become a problem because what was originally a fairly rare practice had been taken up and used too aggressively by too many investors.
He said: “Short-selling in a way can be beneficial because it can iron out the steep falls in stock value if its done responsibly. I think you will see fewer investors taking such aggressive positions in the market.”
He added it was unfair to blame to results of short-selling entirely on investors, as every deal also needed a willing seller.
When the ban was introduced, FSA chief executive Hector Sants said that while short-selling was a legitimate investment technique in normal market conditions, “extreme circumstances” had given rise to “disorderly markets”.
Although the FSA will be reintroducing short-selling, it will keep some weaker rules requiring firms to disclose short positions beyond certain thresholds.
Sally Dewar, managing director of wholesale and institutional markets at the FSA, said: “We believe that these proposals are the right measures for maintaining orderly markets.
“Continuing the disclosure obligations as we propose will reduce the potential for abusive behaviour and disorderly markets.
“In addition, we will not hesitate to reinstate the ban if necessary.”
The move by the FSA had been opposed by MPs including Treasury Select Committee chairman John McFall. He was joined by Liberal Democrat treasury spokesman Vince Cable, who said the ban should at least be kept for financial institutions which were fundamentally important to the system and would have to be bailed out by taxpayers if they collapse.
There were fears that reintroducing short-selling could cause the value of banks’ shares to drop sharply at a crucial time for the country’s economy.
Mr Cable said: “When you have a fire raging, you don’t start throwing paraffin around the place and making it worse, which is what is happening here.
“What has changed since the original crisis is that the Government is now part-owner of these banks into which short-selling is going to be reintroduced.
“Effectively this is an open invitation to short-sellers to gamble against the taxpayer.”