Watchdog probing claims brokers are short-selling banks
Trading strategy banned by Financial Regulator in 2008
Published 26/02/2010 | 05:00
The Financial Regulator is probing allegations that some overseas brokers have been allowing customers to 'short' Irish bank shares despite a ban on such activity.
Short-selling is a trading strategy -- beloved by hedge funds -- where investors can profit from falling stocks.
However, such trading in Irish bank stocks has been banned by the watchdog since the financial crisis went into overdrive in September 2008.
The ban remains in place even though other authorities such as the UK Financial Services Authority have relaxed their curbs.
The Irish Independent understands the regulator was contacted in the past week about one European trading platform offering short-selling trades on Irish bank shares through a financial product called contracts for difference (CFDs).
Providers of these instruments allow investors to place bets on assets increasing or falling in value. The purchaser doesn't actually own the shares.
In a statement, the regulator said: "All brokers, including those based outside of Ireland, must maintain a sustained awareness of the continuing requirement to refuse to execute transactions with persons aiming to short sell Irish bank shares."
It also reaffirmed that the ban on short-selling remained in place.
Another common way for an investor to 'short' a stock is to borrow shares in a company and sell them in the market in the hope that the price will fall.
The investor can then buy the shares back and return them to their original owners -- pocketing the difference as profit.
Market participants have also noted that trading volumes in Allied Irish Banks' American depository receipts (ADRs) in New York, for instance, has been higher so far this year than the amount of shares changing hands in Dublin. ADRs are used to trade ownership in shares of a foreign company trading in the US.
Bank of Ireland's ADRs are sometimes more heavily traded than its Dublin stock.
Some senior market players have also suspected on occasions in recent months that short-selling has been going on abroad in Irish banks.
They have also noted trading patterns that are often linked to a 'short squeeze' -- when short-sellers rush to close their positions to cut their losses if a stock rises unexpectedly. This, in turn, often propels the stock even higher.
But none of the banks themselves have reported any such strange activity in their shares.