A Conservative peer has called for a crackdown on firms that bet on falling share prices, claiming that ordinary investors can be unaware that their shares are being loaned to short-sellers.
Lord Vinson of Roddam Dene, whose life peerage followed a career in industry and finance, has asked the Government to consider a ban on short-selling where the beneficial owner of the shares has not given their permission.
Ordinary investors who use a fund manager sign up to terms and conditions, which can include allowing their stock to be made available for short-selling. However, Lord Vinson argued that this condition is not well understood by many investors and that it should be made clearer.
“I’m a dedicated capitalist, I’m a capitalist up to my eyeballs,” he said. “But the large amount of money that’s made out of shorting is made up of everybody else’s bills.”
Short-selling is a long-established tactic to profit from falling prices by borrowing stock from a large investor or broker and selling it on to a third party. If the share price declines, the short-seller can then buy shares and return them to the original owner – pocketing the difference in value.
Responding to Lord Vinson’s parliamentary question, the Treasury minister Lord O’Neill described the strategy as “a legitimate and longstanding investment technique that can provide a positive contribution to efficient market functioning through supporting price formation and providing liquidity to markets”.
He added that fund managers are required to tell investors about the possibility of short-selling in the fund prospectus, and that the Financial Conduct Authority already has the power to deal with share loans made without the beneficial owner's permission.
Short-selling has spiked in recent months as the global stock markets tumbled. According to the data provider Markit, loaned shares in the S&P 500 rose to more than 3.2pc of the value of the entire index in mid-January, surpassing the last peak seen in 2011 when markets across Europe resorted to a ban on short-selling.
The practice was temporarily outlawed in China last year as the regulators struggled to contain a market panic tearing through the Shanghai and Shenzhen stock markets.
Many countries since the financial crisis have placed limits on “naked short-selling”, or bets on falling prices without holding the underlying asset. Goldman Sachs last month paid $15m to settle a US civil case for charging short-sellers for the service of lending them shares, without making sure that it had such shares available.
Regulators in the UK and across Europe require all short-sellers to declare their position once it represents more than 0.1pc of the target company’s overall value, and make a position public once it passes 0.5pc.
In the London market, roughly half of the FTSE 100 companies are currently the subject of a large short bet, according to the FCA’s register. Some of the positions – such as the hedge fund Lansdowne’s short against Provident Financial – have been in place for severals years.
Others pile up rapidly in response to news. Seven major short-sellers have adjusted their exposure to Sainsbury’s since the supermarket revealed takeover interest in Home Retail Group at the start of the year.
Lord Vinson, a Conservative peer since 1985, was a director at the private equity firm Electra until 1998 and has sat on the board of numerous investment trusts. He helped set up the Centre for Policy Studies and is the life president of the free market think-tank the Institute of Economic Affairs.
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