KEY POINTS:
New Zealand fund managers and retail investors have been caught up in the bans on short-selling with some describing the changes as chaotic and "flying in the face of capitalism".
Britain was the first to ban investors from taking short positions on banking and financial institutions' shares last week and was followed on Friday by bans in the US sharemarkets.
The Australian stock exchange (ASX) took it one step further on Monday banning short selling across the entire market. Its introduction saw a one hour delay of the market opening as clarification was sought over who would be affected.
The bans have been introduced to stop investors from shorting shares and driving share prices to the point of collapse. The finger has been pointed in particular at some US hedge fund managers who are said to have purposely driven down the price of shares using "naked" shorting in companies like the now bankrupt Lehman Brothers in order to make a profit.
Sargon Elias, New Zealand general manager of global company CMC Markets, described the situation as "chaotic".
"At the moment we are all trying to just understand what it means."
CMC Markets provides contracts for difference - complex products aimed at retail investors where an investor agrees to exchange the difference in the price of a security between the time a contract is opened and the time it is closed.
The contracts can be used to go long or short on a share price depending on whether an investor believes it will go up or down. Elias said Britain had been clear about including CFDs in its ban but other countries had not made it so simple.
"In different areas the rules are quite different," he said.
"In the UK we definitely can't because they specifically excluded CFDs. But we have also taken the position that we can't offer it in other markets because we can't hedge."
Elias said it appeared the ASX had been caught unaware and it had been a bit chaotic. "It seems to be regulation on the hoof."
Neale Jackson, equities manager at OMFinancial which also offers CFDs to retail investors in New Zealand, said anywhere it had to physically buy stock to short in Australia was affected. Jackson said rumours in the market had alerted it to the possible changes in Australia on Friday.
He said the negative reaction to the move was evident in the fall of the ASX's own share price.
"The move has not been welcomed. It does fly in the face of capitalism a little to tamper with the market."
Jackson said the ban did not affect investors with existing short positions, just those taking new positions.
Whether the bans were necessary depended on where you were coming from, he said.
"It has caused quite a bit of distaste among traders. But for companies in trouble it could throw them a lifeline. For a trader it's the matter of a few dollars lost - but if it keeps a company going and staff employed it's a small price to pay."
The British ban extends until the end of the year while in the US it lasts until October 10. Australia had put its ban in place for one month.
THE NAKED TRUTH
* What is short-selling?
An investor borrows shares from a broker and sells them, hoping the share price will fall. They buy the shares back at a lower price before they have to be returned, booking a profit. Brokers charge a fee for lending out the shares.
* What is 'naked' short-selling?
Naked shorting is when an investor sells the shares without borrowing them first, agreeing to deliver them at a fixed time. The seller buys the shares once the price has fallen and before it has to deliver them to the buyer.
This causes problems as it can mean more shares are being bought and sold than actually exist. If enough people do this it can drive the share price down. US hedge funds have been seen to be the worst hedge fund culprits and have been blamed for helping to bring down the share price of the now bankrupt Lehman Brothers.
