Sir Howard Davies, the chairman of the Financial Services Authority, sanctioned the widely criticised practice of short selling yesterday and said the City watchdog would not impose general curbs on the activity despite it exacerbating the stock market's recent volatility.
Short selling is the sale of borrowed shares in the belief that their price will fall, allowing the vendor, typically a hedge fund, to buy the borrowed stock back at a lower price.
Sir Howard said: "In normal circumstances short selling is a natural and important feature of the market. Many would argue it improves 'price discovery'."
Sir Howard said the FSA would act only if it flouted the rules that guard against insider dealing and share price manipulation. The FSA also revealed that it had found no evidence yet of terrorist involvement in the shorting of certain London-listed shares ahead of the attacks in New York. The investigations were ongoing, the FSA said, but it had established that some transactions had a ready explanation. For example, a massive put option against shares in a British airline, believed to be British Airways, turned out to have been placed by another airline as part of its hedging strategy, the FSA said.
Meanwhile, the Government yesterday announced plans to beef up the powers of UK authorities to seize financial assets of terrorist organisations. Gordon Brown, the Chancellor, said Britain would promote a United Nations resolution aimed at cutting off their sources of finance. Mr Brown said the UK legislation would probably be part of the Proceeds of Crime Bill.Reuse content