Prof. Jayanth R. Varma’s Financial Markets Blog

A blog on financial markets and their regulation

Insider Trading by Underwriters

Robert Preston at BBC News reports
about the extraordinary insider trading that took place after the HBOS
rights issue flopped miserably and the underwriters were left holding
the bulk of the issue:

On Friday, Dresdner and Morgan Stanley both knew that existing
shareholders had shunned the rights issue, since they were organising
the share sale. But the market was only given the information this

That information was – in theory at least – highly price
sensitive. You’d think therefore that both Dresdner and Morgan
Stanley would be banned from dealing in HBOS on their own account till
the market had been told the extent of the rights take-up.

But apparently no such prohibition applied.

Well after the rights closed at 11am on Friday, they were both
allowed to take a short position in HBOS, to cover themselves against
a future fall in the HBOS share price.

So they duly shorted HBOS in massive size. I understand Morgan
Stanley took a 2.4 per cent short position in the mortgage bank –
which is huge.

If this story is true, it means that the UK Financial Services
Authority (FSA) has given up all pretence of being a referee rather
than a market player itself. The FSA’s stand against what it
called abusive short selling now sounds truly hollow.


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