Exponents of shorting - the practice of selling shares you do not own in the hope of buying them back again at a lower price - argue it helps liquidity, allowing the market more adequately to reflect the balance of supply and demand. Opponents believe it makes stocks vulnerable to bear raiding and manipulation. In the recent Eurotunnel rights, Alastair Morton, co-chairman, alleged that big City investors deliberately drove the price down to the disadvantage of the company and its other shareholders by shorting the stock.
Likewise in the cases of the Wellcome and BT3 share issues, there were widespread claims that shorting was used to drive the price down. What to do about it? The stock exchange in a consultative document issued yesterday rightly rejects the idea of an outright ban. One of the reasons why the London Stock Exchange remains internationally competitive is the relatively liberal trading practices it allows. Plainly, however, international issuers are not going to use London as the capital market of choice if there is any possibility of the system working against the interests of the vendor.
Britain's quote-driven market making system prevents an exact duplication of the rules set up in the US to prevent abuse. An 'uptick rule', whereby shorting is allowed only if the last movement in the price is up, would be practically impossible in the London market. But a general prohibition on covering short positions by subscribing for shares in the offer seems eminently sensible. So too does formalising an issuer's ability to penalise shorters by refusing to allocate them stock. How easy such rules would be to police is another matter.Reuse content