Short selling in the sharemarkets of the United States and United Kingdom is coming in for a grilling as regulators on both sides of the Atlantic line up to launch investigations, including a temporary ban on the strategy.
Short selling is not illegal.
It involves selling borrowed stock in hopes it falls in value and can be repurchased at a lower price, but in recent years has become a favourite ploy of some hedge and alternate funds with access to large amounts of capital.
However, in achieving massive profits, their aggressive strategies have ruined and broken many companies whose share values plummeted.
The strategy is legal in New Zealand, but practised only by a small number of people, rarely, but is more prevalent in Australia, also running alongside the similar strategy of "contract for difference".
On Thursday, Britain's Financial Services Authority said it would ban short selling in financial stocks until January, but that would be reviewed monthly, Associated Press reported.
The FSA also announced additional disclosure requirements from hedge funds of short sales if a certain threshold is met.
On the same day, New York's Attorney-general Andrew Cuomo launched an investigation into whether some traders used illegal tactics to drive down the stock price of several Wall Street firms.
Mr Cuomo says he will focus on whether short sellers engaged in conspiracy or spread bad information to influence the stock prices of Lehman Brothers Holdings Inc, American International Group and other firms that have been hammered in the ongoing financial crisis.
The United States' Securities and Exchange Commission (SEC) chairman Christopher Cox briefed Congress yesterday on the agency's plans to take the extraordinary step of interfering with the market's regular functioning.
On Thursday, the SEC announced three trading rules that were aimed at curbing abusive short selling and said it had intentions of requiring hedge funds to disclose more information about their short positions.
