The expiry of a ban on short-selling of Britain's financial stocks had no immediate impact on Friday as bank shares rallied, backing up claims by some investors that the ban was cosmetic and ineffective.
Short-selling — selling borrowed stock in the hope of repaying the loan at a profit by buying the shares back at a lower level — was blamed for adding to sharp falls last year by top banks, including HBOS and Royal Bank of Scotland (RBS).
UK bank shares were broadly steady on Friday, with the FTSE 350 banks index up 1 percent at 1110 GMT.
RBS shares jumped more than 7 percent and Lloyds TSB added 3 percent, bouncing back from sharp losses this week on optimism government moves on both sides of the Atlantic will help shore up the sector.
"We are not seeing much in the way of short-selling," said Manoj Ladwa, a derivatives broker at online spread betters ETX Capital.
The Financial Services Authority (FSA), which imposed the short-selling ban in September, has said it would reintroduce the measure without consultation if needed.
Exaggerated share price declines unnerved investors and depositors and ultimately forced the British government to recapitalise some of the financial firms by taking major stakes.
"The effectiveness of the short ban was zero," said Stephen Pope, global market strategist at Cantor Fitzgerald Europe.
He said between May and September, before the short-selling ban, UK bank stocks underperformed the market by less than 1 percent, but between September and the end of the ban their underperformance reached 27 percent.
This was mainly because the government banned dividend payments from banks that had taken public money, forcing long-only investors to sell as well because they did not want to be cut off from the dividend flow.
Jacqui Hatfield, a regulation lawyer at law firm Reed Smith, agreed: "The share price will likely continue its steady fall but not significantly as a result of the removal of the ban."
The FSA has said it will extend rules requiring net short positions in financial stocks to be disclosed until June 30, although disclosure will only be required at 0.1 percent bands.
Later this month parliament's Treasury Select Committee will also hear evidence from high-profile hedge funds such as Marshall Wace and The Children's Investment Fund on short-selling, financial stability and other issues as part of its inquiry into the banking crisis.
"Hedge fund operators, who are largely blamed for the significant falls in HBOS and RBS leading up to the ban, will be keen not to have the ban imposed again and are likely to bide their time before short-selling again to a significant degree," Hatfield said.
"In addition, the slightly modified disclosure requirement will still be in place to deter any potential abuses."
Hedge fund managers, prime users of the strategy, said last week there were other unforeseen consequences of the ban for the banking sector.
David Stewart, chief executive of Odey Asset Management, said lifting the ban will mean some hedge funds will start shorting banks again, but it will also see purchases of other financials in so-called pairs trades, in which investors bet one stock will outperform another in the same sector, regardless of overall market movements.
"For funds with long-short pairs (trades), as soon as they couldn't have shorts they had to sell their longs," he said.
"A lot of pressure on banks was because of the short-selling ban, which was ill-conceived and ill-thought out."
