Shorting still weak after UK ban ends

January 30, 2009Andy No Comments »

Christopher Whittall, Risk News,

UK, There has been little evidence of increased short selling activity on UK financial stocks since the Financial Services Authority (FSA) lifted its ban on the practice on January 16.

Figures from London-based Dataexplorers.com, a provider of information on the securities financing industry, show that the percentage of shares outstanding on loan for three major UK banks Royal Bank of Scotland, Lloyds Banking Group and HSBC rose only slightly between January 15 and January 28. Royal Bank of Scotland shares on loan went from 0.22% to 0.62% of total shares outstanding, Lloyds shares from 1.19% to 1.3% and HSBC from 1.53% to 2.47%.

Barclays proved a slight exception. Its shares outstanding on loan rose more sharply after the ban was lifted, from 3.14% on January 15 to 5.81% on January 23. Over this same period, its share price dropped 61% from 130.4p to 51.2p.

However, with Barclays’ share price recovering dramatically on January 26 to 88.7p, traders who had sold the stock short could have got badly burnt. The turnaround came after an open letter from the bank’s chairman, Marcus Agius, and chief executive, John Varley, reassured investors that the bank was adequately capitalised and would not require an injection of government money.

There was minimal evidence of short positions being closed the next day, however, with Barclays shares outstanding on loan only dropping 0.02 percentage points to 5.79%. As of January 28, this level had risen again to 6.19%, while the share price stood at 107p.

On September 18, the FSA imposed a ban on short selling on 34 UK financial stocks. The practice had come under fire for allegedly accelerating – or even precipitating – the fall in UK bank shares. Proponents of short selling defend say the practice adds liquidity to the market and irons out pricing inaccuracies.

The FSA will continue to require disclosure of net short positions in UK financials until June 30 if the position reaches 0.25% of the institution’s issued share capital.

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