The dramatic intervention by the regulatory authority comes in the face of market abuses which have seen investors making huge profits from ailing businesses.
The ban on short-selling - a controversial means of share speculation that involves selling borrowed stock to profit from expected price falls - is effective until 16 January, 2009, when the FSA will take a view on the market conditions and decide whether to extend the trading restrictions.
FSA chief executive Hector Sants (pictured) said: "While we still regard short-selling as a legitimate investment technique in normal market conditions, the current extreme circumstances have given rise to disorderly markets.”
Potential
Barney Reynolds, head of the financial institutions advisory group at Shearman & Sterling, said: “The FSA has made a very sensible and indeed pretty much essential decision – short-selling in this environment can eat fatally into the self-confidence of the market and could well have bought down Lloyds-HBOS.”
Some partners have voiced concerns that interventions like this should be a rare occurrence.
James Perry, co-head of Ashurst’s financial institutions group: "It is hard to argue with the reasons for this step - many would say it is overdue - but, as ever, people worry about the consequences and what comes next. We believe that this type of intervention should be truly exceptional, and not repeated whenever a sector is sold for entirely legitimate economic reasons.”
The decision comes at the same time as the US Securities and Exchange Commission (SEC) announced similar measures after a torrid week that saw the collapse of investment bank Lehman Brothers.
The
Dominic Hill, a partner in the financial institutions group at Lovells, commented: “It is a dramatic step to take and whether it is justified or not is a matter for the Government and the regulators to decide.”
A competition partner at a top US firm commented: “This is unprecedented, but absolutely the right decision by the Government. There has been a campaign in recent years to de-politicise the merger control and this will go some way toward achieving that.”
See How free-market are lawyers feeling as public solutions turn the tide? for more analysis.