Crackdown on short-selling leaves the city's 'robbers in pinstripes' facing huge losses



Ruthless City traders who made millions by sending share prices into freefall were finally the big losers.

The crackdown on 'short-selling' triggered a record-breaking rise in the FTSE index of Britain's 100 biggest public companies.

Because the short-selling traders make their money when stocks fall in price, yesterday's announcement left them with a multi-million-pound bill.

Defiant gambler: Trader Simon 'Knievel' Cawkwell

They rushed to close down all their deals in a bid to cut their losses before the market rose any further.

Short-selling involves a trader borrowing somebody else's shares in a company he thinks is going to fall in value.

The trader then sells the shares.



Eventually he must buy the same number and return them to the lender. If the price has dropped by that time, he makes a profit on the difference.

In order to drive down the price, many short-sellers spread malicious and false rumours to trigger a fall in the share price - and make themselves a fortune.

It is a concept which many people find difficult to understand, as they assume investment only involves buying shares and hoping the price goes up.

Defiant short-seller Simon Cawkwell said the big funds would have lost billions overnight but claimed they would live to fight another day.

The trader - known as Evel Knievel is thought to have made more than £750,000 betting this way during the turmoil in recent weeks.



The crackdown, which came into force at midnight on Thursday, stops any trader from 'short-selling' 29 financial stocks, including those of all the high street banks.

After a week of stock market mayhem, other countries, such as Ireland and Australia, also joined in the crackdown the practice.

In the U.S, the Securities and Exchange Commission issued an emergency order to stop short-selling temporarily.

It is banned in nearly 800 financial stocks in a bid to protect investors from the disastrous share price plunges which short-sellers can trigger.

The market turmoil in the U.S. has sent three of its five major investment banks - Bear Stearns, Lehman Brothers and Merrill Lynch - into bankruptcy or forced them into an emergency merger with a rival.

For the next four months, the Financial Service Authority's ruling means it is illegal to take out or increase a 'short' position in any one of these companies.

While it is not illegal to continue to 'short', such deals must be disclosed by 3.30pm on Tuesday if they represent more than 0.25 per cent of a company's portfolio.

The threat of exposure prompted many short-sellers, which include notoriously secretive hedge funds, to close, rather than disclose, their positions.



Final payday: Lehman Brothers' workers arrive at its London office on Friday to make sure they are paid their last wages following the bank's collapse

One market expert said it was rather like asking Coca-Cola to give away its secret formula.



Liberal Democrat Treasury spokesman Lord Oakeshott said: 'They don't like the exposure. They want to remain anonymous so they are closing, not disclosing.

'They thrive in the dark and are totally unaccountable.

'The FSA's ban on the short selling of bank shares is a death sentence hanging over many hedge funds.'

He predicted the widespread closure of hedge funds, particularly if the City watchdog carries out its threat to include other industries in the temporary ban.

The last laugh: Gordon Brown wants to clean up the City's dirty practices

Financial experts attacked the FSA's ruling on short sellers, accusing it of a massive over-reaction.

David Buik, from the brokers BGC Partners, said it is 'totally naive' to blame them for the collapse in the recent plunge in share prices.





He said: 'It is not the short-sellers' fault that HBOS, the housebuilders, M&S, Next and others have lost so much value this year.

'It is sentiment which has been negative towards these sectors. To blame it on short-sellers is totally naive.'

David Rule, chief executive of the International Securities Lending Association, which represents companies which lend shares to other investors, including short-sellers, said the level of short selling was 'pretty modest' in banks.



'The idea that short-selling was driving down HBOS was frankly far-fetched,' he insisted.



'There is not real evidence that there was a huge short position in the bank.'