Short-selling has been blamed by many political figures for tumbling share prices in banks, and the collapse of Lehman Brothers in September. It is thought that falling share prices lead to a loss of confidence amongst investors, which can cause them to withdraw funding lines and leave institutions teetering on the brink of ruin.

Whilst the decision to bring back short selling will be unpopular with cautious politicians, many financial figures are hailing it as a sign that the banking sector is now strong enough to cope with normal market activity.

Short selling is a legitimate practise in which hedge funds make a profit from a predicted drop in the price of a firm’s shares. This is done by borrowing a stock and selling it on before buying it back a short period later at a lower price, returning it the original owner and keeping the price difference.

The ban on short selling in October was said to be necessary as markets had “ceased to function normally.”

Now that leading British banks have been recapitalised it is not expected that the return of short selling will lead to falling bank share prices, yet only time and market activity will tell the true story.