The

UK financial regulator said it has banned short selling in a bid to prevent financial institutions coming under attack, a move that drew scorn from the hedge fund industry. The ban came into force yesterday from 12 midnight, BST.

The Financial Services Authority said in a statement that from 23 September, it will also require daily disclosure of all net short positions in excess of 0.25 per cent of the ordinary share capital of the relevant companies held at market close on the previous working day. Disclosure of such positions held at close on 19 September will also be required on 23 September, it said.

The FSA acted after shares in firms such as
UK lender HBOS, which has agreed to be bought by

UK banking group Lloyds TSB, came under heavy pressure. Hedge funds and other investment players have been criticised for the practice of short-selling and blamed, in part, for the demise of some financial institutions.

However, defenders of short-selling argue that the technique makes markets more efficient by increasing the number of counter-parties and that it is beneficial for investors to be able to make money by taking negative as well as bullish views of a company’s stock or bonds.

In its statement, the FSA said: “The FSA stands ready to extend this approach to other sectors if it judges it to be necessary.”

The FSA’s provisions will remain in force until 16 January 2009, although they will be reviewed after 30 days. A comprehensive review of the rules on short selling will be published in January, the FSA added.

The Association of Alternative Investment Managers, which represents the hedge fund sector, defended short selling. “Short selling is not the real cause of the decline in HBOS share value, nor are hedge funds to blame for wider, exceptional market volatility,” Florence Lombard, chief executive of AIMA, said.

“The true cause appears to be a widespread lack of confidence by all investors in financial markets related to much deeper market issues. These issues include excessive lending practices by banks and an inflated property market on both sides of the
Atlantic," she said.

AIMA said a ban on shorting would result in a false market with overvalued stock prices, and it said a better solution would be to ensure that proper information was provided to the market by banks so it could value equities accurately.