The suspension of negative bets on financial firms' shares has not worked, it was claimed.
The government's recent ban on short-selling financial stocks has been ineffective, the Centre for Economic and Business Research (CEBR) has said.
An expert at the organisation said that problems in the financial markets were far too deep-seated for the suspension, which was imposed by the Financial Services Authority (FSA) last month, to be effective. It was introduced due to the negative pressure which short sellers, concerned about the health of the banking sector, were putting on financial stocks.
Short selling is a negative bet made by an investor on a particular firm. It works by the investor borrowing a stock from another investor - paying a fee for this service - and then selling it immediately.
After a certain period it is then bought back and then returned to the original owner. If the share's price has dropped, as the investor expects, he or she pockets the difference - as less was paid for purchasing the share than for selling it.
At the time of the suspension, Hector Sants, chief executive of the FSA, said: "We have taken this decisive action, after careful consideration, to protect the fundamental integrity and quality of markets and to guard against further instability in the financial sector." However, since the ban, the financial instability has worsened still further, with the FTSE 100 fluctuating wildly, banks continuing to refuse to lend to each other, and Bradford & Bingley being nationalised after nearing collapse."
Charles Davis, senior economist at CEBR, commented: "[The ban] is a measure to try and quell some of the recent instability, [but] in terms of a solution to the structural problems in the sector it is clearly not a solution to that.
"It is not something that is going to solve the causes of the credit crunch at the moment. It is essentially clamping down on speculators...there has been a feeling that they have just been driving down prices and adding to the sense of general panic."
The FTSE 100 endured a further sharp drop this morning, despite the shorting ban. The index has dropped by around five percent so far this morning.
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