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The Financial Services Authority has clamped down on the lucrative practice of short-selling shares on the London market, following accusations that traders were seeking to profit from the difficulties of some of Britain's best-known companies.

The City's financial watchdog has announced that from this Friday, all investors will be required to disclose any short positions greater than 0.25 per cent in companies that are preparing for a rights issue.

In a statement, the FSA said: 'In current market conditions, there is increased potential for market abuse through short-selling during rights issues. As a result, there has been severe volatility in the shares of companies conducting rights issues. This is potentially damaging not only to the issuers in question but also to confidence in the overall fairness and quality of the UK market.'

Two things will happen. Hedge fund managers have already accused the FSA of making broad changes to the rulebook without any consultation. The Alternative Investment Management Association says the industry will seek a meeting with the FSA to argue its case. There is a possibility that the FSA might be the target of a wave of litigation - something that occurs frequently when market conditions are bad.

Meanwhile hedge fund managers, arguably the best investment strategists in the world, will moan about these changes for a little while before finding other tactics to take advantage of ongoing market events. Will the FSA try and block those too?

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