Short-selling practice deemed "legitimate activity" by watchdog

Market players who make money in a falling market by borrowing shares to buy back at a lower price – short-selling – will not face regulation.

The Financial Services Authority has been investigating short-selling amid fears it was increasing market volatility and distorting prices. It said there was no case for regulating the activity, saying it played an important role in "supporting efficient markets".

An FSA spokesman said: "We began looking at the sector since last year as the ongoing bear market was increasing focus on it. We wanted to see whether it was contributing to the short term volatility in the market. But the feedback we got did not give us the impression that people were short-selling to drive down prices. It is a legitimate activity." He said existing market abuse laws were sufficient to cover any malpractice.

The FSA does, however, intend to improve transparency of short-selling activity and has asked CrestCo, the share settlement company, to publish monthly stock lending data of the FTSE 350 index. CrestCo expects to have a service running by the summer that will show what portion of a company's shares have been borrowed by investors. The move will bring the London market in line with the Dow Jones and the Nasdaq indices, which publish monthly information on how many shares of each company have been sold and not re-bought.

The FSA had put forward a number of options for providing more information on short-selling activity, including publishing all short sales in the cash equity market and reporting sales in the cash equity and the derivatives markets.

It backed away from an earlier proposal to force investors to disclose short positions above a certain threshold.