What does the future hold for short selling?
It seems some people in the financial sector never learn any lessons. Despite the FSA’s recent clampdown on short selling, prominent figures in the business world continue to extol the virtues of the practice. Just to recap, short selling was one of the reasons why major banks and mortgage lenders recently saw their share prices collapse. As a result, billions of pounds of taxpayers money has been used to prop up ailing financial institutions. The FSA – justifiably alarmed at the damage short selling was doing to long-established City institutions – last month stepped in and banned such activity in order to protect leading financial PLCs, including insurance giants Aviva and RSA.
However, the recent havoc in the financial markets has not dampened everyone’s enthusiasm for short-selling. This week, the head of the global trade association for stock exchanges defended the practice, which basically consists of investors selling borrowed shares – in the hope their price will fall – with a view to buying them back at a reduced price and making a profit. William Brodsky, the new chairman of the World Federation of Exchanges, said short selling was a vital tool for markets and that we should not blame the practice for the financial sector’s plight. Speaking at a news conference following a two-day meeting of the WFE in Milan, Brodsky said: “We must be very careful not to demonise short selling – it is a very important part of a complicated market structure.”
At least the outgoing chairman of the WFE – Massimo Capuano – has demonstrated that he has learnt something about the dangers of short selling during his tenure. Speaking at the same news conference, Capuano said that he understood the need to ban the practice.
But the fact that a prominent figure such as Brodsky is a supporter of short-selling will cause concern among taxpayers who have seen considerable amounts of their money spent on bailing out banks that have been brought to their knees as a result of the practice.
Last month, the Prime Minister said that the FSA’s temporary ban on short selling could become a permanent one. Taxpayers will be hoping that he is as good as his word.
