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Is it time to reintroduce a short selling ban?

In many ways it is a case of déjà vu with the UK banking sector under severe pressure amid suggestions that a number of financial institutions are engaging in what is known as "short selling". This act involves the selling of shares which the parties involved do not own with a view buying them back at a later date, hopefully at a lower price, to create a profit. Towards the end of 2008 the authorities introduced a ban on short selling amid suggestions that the activity had exacerbated the concerns within the banking sector but the ban recently ended.

Many markets traders believe that the issue of short selling is something of a smokescreen because while there are some rogue traders who will spread rumours in order to weaken share prices, in reality informed investors would traditionally take advantage of such "artificial scenarios" to pick up shares at lower levels. It is very difficult for any short seller to have a major impact on a sector or particular share without investor concerns already being present, such as the banking sector.

In many ways the only real solution to the issue is for quoted companies to be more transparent and deliver information quicker to the market which should head off any potential shortselling issues backed by rumours. In reality shortselling can have an impact but without fundamental concerns about a particular share of sector the actual impact would be fairly irrelevant.

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