Markets rally as institutions move to curb short sellers

Financial Institutions and City regulators moved to stabilise the UK stock market yesterday after the precipitous falls of last week. Several of Britain's biggest banks and fund managers placed an immediate ban on the practice of stock lending to try to limit the wave of short selling that has placed equity prices under such pressure.

Separately, the Financial Services Authority (FSA) confirmed that it would relax the rules that have forced insurance companies to sell billions of pounds worth of shares for short-term, technical reasons. The measures appeared to work, with the FTSE 100 index of leading shares closing 180.2 points up at 4,613.9. In New York, the Dow Jones Industrial Average also rallied and closed up 367 points at 8,603.03.

However, equity strategists said the bounce was due to other factors. Richard Kersley of Credit Suisse First Boston, said: "On Friday we got a sense that valuations for long-term investors were too low and we have found levels where there are buyers around. But it is too early to say that we have left behind the volatility of the last couple of weeks." David Manning, head of UK equities at Foreign & Colonial, agreed: "With the market down this far, ... there are some bargains out there and it is not surprising that people are getting tempted."

The rise came as several banks moved to limit the practice of short selling, where traders sell stock they do not own in the hope of buying it back more cheaply later. HBOS, the merged Halifax and Bank of Scotland, said its asset management division would no longer lend stock to traders so they could sell short. A spokesman for HBOS, which has £75bn under management at its Clerical & Medical and Halifax Life divisions, said: "In the current market climate the profits made from stock lending are dwarfed by the damage that short-selling activities are inflicting on the life savings of ordinary investors." HBOS said it typically made fees of "a few million pounds" from lending stock. Prudential said it was stopping lending stock in airlines and insurance companies, the two sectors worst affected by the terrorist attacks on the United States. Legal & General said it had stopped stock lending last week, as did Foreign & Colonial.

The move came after the speculator George Soros defended short-selling. "I am at a loss to understand what is unpatriotic about it," he said.

Barclays Global Investors, which has £548bn under management, said it would continue lending stock as normal. Andrew Speers, head of securities, said: "We do not intend to stop lending. We have been doing it for 20 years and it is an important part of providing a liquid, efficient market. We believe that anything that changes the structure of a normal, orderly market could have other ramifications." He added that there were so many other stock lenders in the market that the decision by a few to stop it would make no difference.

For the second time in two weeks the FSA relaxed guidelines that have forced insurance companies to sell shares to meet solvency tests. It said life insurers no longer need to make an ongoing assumption of a 10 per cent fall in equity markets in order to remain within the solvency guidelines.

Figures yesterday showed net sales of unit trusts dropped 14 per cent in August – down more than two thirds compared with the same month in 2000. The figures for September are expected to be even worse.