Nasty, brutish and short

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: in the long run stockmarkets tend to rise. It is also a minority activity: only 4.3% of shares on the New York Stock Exchange had been sold short at the end of May (see chart). Data for London are less transparent, but the best proxy is the level of shares being lent (to bet on a share price falling, short-sellers often borrow stock and then sell it). According to Data Explorers, a research firm, only 4.5% of the FTSE 100 index’s value is out on loan. Many short sales are innocuous attempts to hedge other positions. Unlike going long, actively betting against a share price involves red tape and runs the risk of unlimited losses (since a share price can, in theory, rise for ever, whereas it cannot fall below zero). The best bears, says Jim Chanos, of Kynikos Associates, the world’s biggest short fund, are not bullies but “financial detectives”, scrutinising companies. The short-seller that infuriated MBIA’s management, William Ackman of Pershing Square Capital Management, was certainly vocal, but nobody doubted that he had done his homework.

If short-selling is generally beneficial, does it face hurdles? America introduced the “uptick rule” in 1938, aiming to act as a “circuit-breaker” by forcing short-sellers to execute above the price level of the last reported market trade. It has recently scrapped this rule, which short-sellers argue was largely symbolic, and it remains in place at only a few of the world’s big stock exchanges. Both the SEC and Australian regulators are examining “naked short” positions, in which a fund sells shares it has not yet got in its hands, gambling that it can borrow some before the trade is settled. Still, regulators’ concerns about naked shorting mainly reflect the risk to settlement, rather than to the integrity of large companies’ share prices. Finally, almost all countries (although not Britain) require aggregate short positions in individual stocks to be disclosed.

None of these restrictions impose a really onerous burden on short-sellers. Compared with them, the FSA’s intervention is heavy handed. Forcing funds to disclose short positions if they exceed 0.25% of the capital of a company in a rights issue is far more stringent than the obligations long positions face—and probably bureaucratic too. But it is the FSA’s threat to “take further measures” if need be by, say, limiting stock lending during rights issues, that has really spooked short-sellers.