Watchdog gets more bite in war on rogue traders

It rushed out new rules to stop dubious share traders from targeting companies in the middle of rights issues by short selling their shares.

The new regulations come into force next Friday, and were drawn up yesterday by the FSA board under its chief executive Hector Sants, following suspected share raids on two of Britain's biggest banks.

HBOS was clearly the target of shortsellers earlier this week when its share price crashed below the 275p price of its £4 billion rights issue.

Bradford & Bingley had to scrap one rights issue and replace it with a much cheaper one and a huge cash injection from private equity after its share price came under attack two weeks ago.

Short-selling is the practise of selling shares an investor does not actually own in the hope of buying them back more cheaply later. It is widely used in the stock market and, as the FSA aknowledges, not in itself abusive and adds to improved liquidity in markets.

The new rules mean that anyone who has a short position of just 0.25% of a company either directly or through derivatives will have to make it public within 24 hours.

That is a huge rise in the level of disclosure required by the FSA. Investors are not required to disclose their stakes in companies in the normal course of business until they go above 3%.

The FSA said it is convinced "there are some elements of the market who are using short-selling during rights issue to commit market abuse".

The watchdog also said it is launching a full review of how companies can raise capital in a more orderly and efficient way.

In addition, it threatened crooks with even more draconian measures, including banning stock lending during rights issues and preventing short-sellers from covering their positions by buying nil-paid rights.

"In current market conditions there is increased potential for market abuse through short-selling during rights issues," the regulator said.

"As a result there has been severe volatility in the shares of companies conducting rights issues. This is potentiallydamaging ,not only to the issuers in question, but also to confidence in the overall fairness and quality of the UK market. It can be particularly prejudicial to the interests of small investors."

The FSA said it will keep the new rules under review as they come into force and will consider changes in the light of experience.