City watchdog looks at ways of publishing details of short selling

The Financial Services Authority yesterday stepped up its campaign to make the controversial practice of short selling more transparent by suggesting that far more transactions could be made public.

Investors who do short sell, used often in bear markets, have been heavily criticised recently over fears the practice further drives down the price of shares and increases volatility.

Some critics have called for short selling to be heavily taxed to deter hedge funds and other fund managers from doing it. Short selling is used by investors who want to make money even when share prices fall. They do this by in effect selling the share and then buying it back later, hopefully at a lower price.

The FSA reiterated its view that short selling does not damage the market. Gay Huey Evans, the FSA director of markets and exchanges, said: "Our view remains that short selling is a legitimate investment activity which plays an important role in supporting efficient markets. We therefore see no case for any prohibition or restriction."

But the City watchdog, which has been consulting financial institutions widely since the summer, does believe there is a need to make short positions easier to track.

The FSA raised the possibility that details of "naked" short sales could be published. These are transactions where the short sale is not covered by borrowing the stock. The FSA said the practice can disrupt the market because if the stock is illiquid, the trader cannot always buy it back easily, making settlement of the deal difficult.

The City watchdog also highlighted the possibility that stock loans could be made public. These loans are often used by short sellers who feel the market is so volatile that they don't want to be forced to buy into a stock at a point that they cannot control. Instead these short sellers approach the deal by first borrowing the stock from an institutional investor such as an insurer.

There is growing support in the City for publishing stock loans but information at the moment is unreliable because the level of these loans does not reflect exactly what short selling activity has been happening.

Crest, which runs the UK shares settlement system, is trying to produce a more sophisticated system which would eradicate problems such as double counting stock loans.

The FSA has for responses to its short-selling discussion paper by the end of January.