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Britain Bans Short-Selling Citing 'Extreme' Market Climate

Stock-Markets / Government Intervention Sep 18, 2008 - 03:48 PM GMT

By: Mike_Shedlock

Stock-Markets See Addendum: Ban is on Financials Only

MarketWatch is reporting Britain bans short-selling, citing 'extreme' market climate .
LONDON (MarketWatch) -- Britain's Financial Services Authority on Thursday announced the unprecedented move of banning short-selling and forbidding any increase in new positions. Also, disclosure will be required on all positions of more than 0.25% of a stock. The ban is due to remain in force until Jan. 16, but it will be reviewed in 30 days.


"While we still regard short-selling as a legitimate investment technique in normal market conditions, the current extreme circumstances have given rise to disorderly markets. As a result, we have taken this decisive action, after careful consideration, to protect the fundamental integrity and quality of markets and to guard against further instability in the financial sector," said Hecton Sants, chief executive of the FSA.

UK Poised To Crash

Banning short selling is an act of pure desperation guaranteed to fail. Short term, I do not know what the market will do, but if shorts are squeezed out an air pocket below will form just as happened in the US with share prices of Fannie Mae (FNM) Freddie Mac(FRE).

The simple fact of the matter is that short sellers add liquidity to the market. Barring bankruptcy, shorts have to cover at some point. Also short selling is a necessary function of market makers.

Finally, attempts to prop up the market simply will not work regardless of what government intervention there is. If by some miracle the market manages a sustained rally after this announcement, it will do so only because the market was ready to rally on its own accord.

I spoke about government intervention in earlier today in China, Russia Intervene In Equity Markets . Inquiring minds should take a look.

Addendum: MarketWatch entered this correction

CORRECT: Britain bans short-selling of financial stocks

LONDON (MarketWatch) -- Britain's Financial Services Authority on Thursday banned short-selling of financial stocks and prohibited any increase in new bearish positions in the sector. Also, disclosure will be required on all positions of more than 0.25% of a stock. The regulator said it may extend the bank to other sectors.

The ban is due to remain in force until Jan. 16, but it will be reviewed in 30 days. "While we still regard short-selling as a legitimate investment technique in normal market conditions, the current extreme circumstances have given rise to disorderly markets. As a result, we have taken this decisive action, after careful consideration, to protect the fundamental integrity and quality of markets and to guard against further instability in the financial sector," said Hector Sants, chief executive of the FSA. (Changes story to show ban is on financial stocks only for now)

By Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Click Here To Scroll Thru My Recent Post List

Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management . Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.

Visit Sitka Pacific's Account Management Page to learn more about wealth management and capital preservation strategies of Sitka Pacific.

I do weekly podcasts every Thursday on HoweStreet and a brief 7 minute segment on Saturday on CKNW AM 980 in Vancouver.

When not writing about stocks or the economy I spends a great deal of time on photography and in the garden. I have over 80 magazine and book cover credits. Some of my Wisconsin and gardening images can be seen at MichaelShedlock.com .

© 2008 Mike Shedlock, All Rights Reserved

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