Exchange seeks views on short-selling rules

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THE DEGREE to which 'short selling' is taking place in a particular stock might have to be disclosed if proposals contained in a consultative document from the Stock Exchange win support.

Short selling occurs when a vendor sells shares he or she does not own. It has been a feature of a number of recent troubled rights issues such as Euro Disney and Eurotunnel.

'We are seeking the market's views on whether it feels regulation is necessary,' said a spokeswoman for the exchange. Comments on the document, issued today, are invited by 31 October.

Anecdotal evidence suggests that professional traders, institutional investors such as hedge funds, and large private customers used short-selling practices to drive down the market price in the BT2 share offer in 1991 and in the sale of Wellcome shares by the Wellcome Trust in 1992.

The practice was also highlighted in August this year when the Stock Exchange had to intervene after the London market ran out of Euro Disney shares.

Four groups can lose out because of short selling, according to the exchange. A company issuing shares in a rights issue will get a poorer price than it hoped, and the credibility of a sponsoring broker might be damaged as a result. Long-term investors who might have wanted to sell while the share price was depressed could be affected, and the practice might make the market as a whole less competitive.

The exchange suggests four approaches to regulation, including disclosure of the aggregate customer short interest to the market and the application of settlement- based constraints.

Banning the practice of covering short sales by subscribing for shares in an offer, and issuers controlling allocation policy are also mooted.