business corporate responsibility economics

Time to ban short selling… again

Short selling is the practice of borrowing shares that stockbrokers think will fall, selling them, and then buying them back at a lower price and pocketing the difference.

  1. September 15th 2008:  HBOS shares lose 34% of their value in a short selling frenzy, forcing a merger with Lloyds TSB. A £39 billion bailout follows, and partial nationalisation.
  2. September 19: Financial Services Authority (FSA) bans short selling in 34 different markets until January.
  3. January 16th: The FSA ban on short selling is lifted. Barclays shares fall 25%.
  4. Barclays continues to collapse, RBS had lost 70% by tuesday, and Lloyds falls 47%. A second bail-out is announced, and further calls for nationalization.

Well done everybody.

Short selling is the epitome of City greed, putting short term profit over long term stability. It’s clearly in the interests of the City to have healthy banks, but they don’t seem to be able to resist the quick profit.

Our economic system is unsustainable. Ethical banking is more important now than it ever has been, and where you choose to put your money really does matter.

Read more about ethical banking here.

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  1. I agree that short selling should be banned. I think people buying shares in a company is a good thing. People buy shares in a company for positive reasons – because they believe in it. If they no longer believe in the company they can sell their stake to someone else. Short selling however is purely about greed.
    Let’s face it, it’s sounds dodgy. A brokerage firm lends your shares in companyZ to a trader as the share price is about to go down, so the trader can sell them at the high price, watch them drop in value, buy them back and then give the shares back to the broker…without you knowing.
    Sounds like the broker and trader taking ordinary people for a ride!
    If it can’t be banned then bring in a new law – so the broker has to get your permission to lend the shares first. That will stop it.

  2. It’s pretty clever, in that the person who owns the shares was going to lose money as they went down anyway, so they don’t really lose out. The broker gets a fee for the lending, so he benefits, and the dealer gets a profit off the fall. On the face of it, everybody wins, or at least nobody loses any more than they were going to anyway.

    Except of course that if everybody is doing it, it creates momentum and it becomes a self-fulfilling prophecy. Like HBOS, which was a perfectly healthy company until the traders rode it over a cliff. When that happens, the shareholders who lend their shares really are losing out, because the short-sellers have trashed a company at their expense.

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