Short Selling...

The FT today reveals that the Financial Services Authority (FSA) is about to introduce a new code of conduct to require traders to disclose any significant short positions in the shares of companies that are in the process of launching a rights issue.

So what is short selling?

This is where traders sell shares that they do not yet own. In other words they have not yet made an offsetting purchase. This is a very risky activity as if the price of the financial market security rises the trader will have to pay an ever higher price to secure the stock. In this case the traders are betting on the shares falling in price. For example, if they might sell 1 million shares at £5. If the share price now falls to £4 the trader makes £1m.

Why are the FSA concerned about short selling?

They worry that it is the main factor that is causing the severe volatility in the share prices of the banks that are now trying to strengthen their balance sheets with additional equity finance.

When will traders have to make these disclosures?

The FSA has said that any short positions that amount to 0.25% of the issued shares would be a significant short position. This would trigger the need for this disclosure.