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Comment: trash, cash and face the music
Evening Standard20 Mar 2008
One scrap of City jargon has become suddenly familiar: "trashing and cashing", or spreading malign rumours about a company in order to profit from the bets you have made that the share price will fall. In the case of HBOS bank shares, that is precisely what seems to have happened yesterday - dealers borrowed stock, sold the shares in the expectation that they would fall then bought them back at the new, lower price after unfounded rumours began to spread that the bank had liquidity problems.
This apparent manipulation of the stock market for profit elicited an unprecedented response from the Bank of England, whose officials rang journalists to tell them that there was no truth in the rumour that HBOS had asked it for emergency funding. It was followed by the regulator, the Financial Services Authority, which issued a stern warning that it would not tolerate traders "taking advantage of the current market conditions to commit abuses by spreading false rumours and dealing on the back of them".
Fine words. Except that it is already an offence to create a false market in shares. The trouble is in establishing that there was a conspiracy to drive down a share price in order to profit from the fall. There is nothing wrong with sharing feelbad rumours about a company - indeed in the current febrile markets it would be surprising if this did not happen - and quite another to conspire to make a profit by doing so. There is certainly nothing wrong with selling shares short, with exercising options to buy or sell shares.
Quite how the FSA will follow through on its threats is a question that remains hanging in the air. If the rogue traders left a trail that the regulators can follow, then it should certainly act on its tough words. But proving a conspiracy to distort the market is a tough call. What it can do is to tighten the requirement for those traders who own signifcant percentages of derivatives in a company's shares to disclose their holdings in much the same way that they would have to if they owned the shares outright.
The underlying problem however is that, post-Northern Rock, the market is very prepared to listen to rumours that banks have liquidity problems, precisely because such rumours may be wellfounded, though this was not true of HBOS. Today's visit by the bosses of major UK banks to Mervyn King, governor of the Bank of England, to promise them more help if it is needed, confirms that feelbad rumours in the sector are unlikely to go away.
