Confusion reigns over new short-selling rules as deadline nears

The Financial Services Authority's ambitious effort to stamp out abusive short-selling got off to a stuttering start yesterday when it emerged that several companies who revealed their holdings under the new rules were not required to do so.

The regulator last week shocked the City by issuing an impromptu rule change demanding that any investors with short positions of 0.25 per cent or greater in a company that is in the process of raising money through a rights issue would have to reveal their stake. The rules were announced a day after shares in HBOS plunged below the 275p level at which it plans to issue £4bn of new shares.

Investors reacted angrily to the sudden introduction of the rules and, on yesterday's evidence, all didn't seem to fully understand them. "Confusion is reigning out there at the moment," said an industry source. ABC Arbitrage Asset Management declared a holding of 843,000 shares in Johnston Press, a stake equal to just 0.13 per cent of the company – well below the 0.25 per cent threshold.

Elgin Capital meanwhile revealed a 0.89 per cent stake in Melrose, which has announced a share placement, but the FSA is understood to not consider the fundraising a rights issue, making Elgin's announcement unnecessary. JGD Management revealed a 0.49 per cent short position in Bradford & Bingley.

Short sellers borrow a stock from a longer-term holder and sell it immediately on the assumption it will fall. They must buy back the stock within a certain period and return it, pocketing the difference between the price at which the shares were borrowed and the price at which they were returned. Heavy short-selling can cause high levels of volatility.