Investors with significant short positions in companies issuing rights will have to reveal those positions, Britain's financial watchdog said, adding it might introduce measures to restrict lending of right issue stocks.
Shares in companies with ongoing rights issues, such as mortgage bank HBOS Plc and newspaper publisher Johnston Press Plc, moved sharply higher on Friday morning on hopes of a return to a more stable trading environment. The Financial Services Authority (FSA), responding to severe volatility in rights issue stocks in recent months, particularly banks, said short selling was "a legitimate technique which assists liquidity and is not in itself abusive.
"But it is also the case that the rights issue process provides greater scope for what might amount to market abuse, particularly in current conditions," the FSA said. Short sellers borrow shares they consider overvalued and sell them. If the price drops, they repurchase the shares, return them, and pocket the difference. Problems can occur if a short seller starts spreading false rumours.
"This (market abuse) is potentially damaging 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.