Curb on short selling leads to gains in early trading

Shares in UK housebuilders rallied this morning amid speculation that institutional funds will curb their lending of stock to short sellers.

Stock Exchange

As a result of the speculation, a wave of short sellers closed their positions by buying back shares.

Short sellers borrow stock from investors to sell in the hope of buying it back at a later date when the price has fallen. They take a cut of any profit.

Investors charge a fee to the short sellers but it is thought that wider losses made in the falling market, driven down by short selling, have started to outweigh these gains.

Taylor Wimpey and Barratt led the way in early trading, with respective gains of 18% (to 55p) and 16% (to 150p).

Other gains included:

  • Persimmon – up 11% to 439p
  • Redrow – up 7% to 228p
  • Bovis – up 6% to 518p
  • Bellway – up 5% to 675p
  • Berkeley – up 3% to 904p

Robin Hardy, an analyst at KBC Peel Hunt, said: “The economics for investors don’t work any more and they are putting the brakes on short selling. We’ve seen a pattern of such bizarre behaviour in recent days that it’s impossible to know where things really are.”

The rises also followed news that the US government is putting together a financial package to provide a permanent solution to the economic crisis.

The rally follows a 4% jump in the Dow Jones industrial average, the strongest gain since 2002.