Industry lobbies for tougher regulation of short-selling

Senior figures in the housebuilding industry are urging the government to introduce tougher controls on short-sellers in the wake of recent stock market volatility.

It follows moves by the Financial Services Authority (FSA) last week to suspend the short-selling of financial stocks until 16 January 2009.

Short-sellers are mainly hedge funds that borrow stock from investors to sell, hoping to buy it back when the price has fallen. They take a cut of any profit.

The practice drives down share prices, and the further they fall, the more the short-seller makes. It has been claimed that some sellers spread false rumours to drive down prices.

Housebuilders have suffered more than most in recent weeks. Figures for the percentage of housebuilders’ shares on loan, which is an indication of how much short-selling is taking place, are far higher than the average, which is less than 5%.

Although most senior industry figures decline to condemn the practice publicly, they are privately calling for reform.

One said: “The whole process needs to be more transparent because it’s a very grey area.”

Another said: “Everybody wants to see tougher regulation, although you have to be careful it’s not a knee-jerk reaction.”

In June, concerns were raised about Barratt’s future after short-selling wiped £275m off its market capitalisation in three days. Mark Clare, Barratt’s chief executive, was said to be “seething” about the falls.

One City analyst said the practice only exacerbated existing problems. “Barratt would have got to where it did sooner or later. Short-selling just drove it there quicker.”