Market sources said the bank was one of a large number of arbitrageurs and hedge funds that lost millions of pounds following yesterday's jump in the NatWest share price.
The investors had gambled on a sharp fall in the NatWest share price following its offer for Legal & General and were caught off-guard by the surprise bid from Bank of Scotland.
The bid arbitrageurs, known as "arbs", make money by exploiting the difference in the share prices of the two companies involved in a takeover.
In the case of NatWest's offer for L&G, the arbs were "shorting" the bank's shares - borrowing shares they did not own and selling them on in the hope of buying them back at a later date - and bought shares in the insurer as a cheap way into NatWest.
However, yesterday's sharp rise in NatWest shares forced many arbs to buy the bank's shares at a much higher price in order to cover their borrowing costs.
Sources said that arbs rushed to sell L&G and buy NatWest straight after the opening. The arbs' scramble to unwind their positions caused a selling frenzy in L&G shares, which left the stock nearly 6 per cent lower at 180.5p in huge volume of more than 170 million shares.
BoS has made it a condition of its bid that NatWest abandons its merger with L&G and few believe that a deal that was already under pressure can go ahead, particularly now that NatWest has adjourned its extraordinary meeting to approve the offer.
There is speculation that foreign insurers, encouraged by the fall in L&G's share price to well below the 210p NatWest had offered, could launch a rival offer. Both Aegon of Holland and Allianz of Germany are thought to have run their slide rule over L&G.Reuse content