Sept. 22 (Bloomberg) -- Australia's corporate regulator extended a ban on short selling to so-called covered transactions, following similar moves in the U.S. and U.K. in an attempt to cut volatility in the stock market.

Traders won't be allowed from today to transact covered short sales, in which stock is borrowed for the purposes of betting on share price declines, unless they are hedging positions, the Australian Securities and Investments Commission said on its Web site yesterday. It abolished so-called naked short sales, in which traders never borrow the shares, last week.

The ban covers all stocks traded on the Australian exchange and follows the U.K., Germany, France and Belgium in barring short sales to defend banks from trading blamed for helping wipe $3.8 trillion of value off global stock markets this week. The U.S. Securities and Exchange Commission halted short selling of financial companies to stop speculators benefiting from the credit crisis that led to the collapse of companies including Lehman Brothers Holdings Inc.

``Anyone who's got a short position this morning is in trouble,'' said James Chirnside, who manages the equivalent of $63.3 million at Asia Pacific Asset Management, a Sydney-based hedge fund manager. ``This decision directly affects about 150 hedge funds, some of which may be forced to close as a result.''

Short sellers try to profit by betting stock prices will fall. In a short sale, traders borrow shares from their broker that they then sell. If the price drops, they buy back the stock, return it to their broker and pocket the difference.

Unwarranted

``Short sellers are not agents of the Devil,'' said Ed Rogers, chief executive officer at Tokyo-based hedge-fund adviser Rogers Investment Advisors Y.K. ``The current market hue and cry on the part of individuals such as John Mack seems completely self serving and totally unwarranted.''

Australia's benchmark S&P/ASX 200 Index jumped 3.5 percent as of 11:23 a.m. in Sydney. Macquarie Group Ltd., Babcock & Brown Ltd. and Allco Finance Group Ltd., among the stock market's biggest losers as they blamed short sellers for targeting their stock this year, surged.

ASIC and the Australian Securities Exchange said the ban on covered short sales did not include hedging positions placed before today. The regulators abolished naked short selling on Sept. 19, raising concerns that investors are flooding markets with sell orders to drive down prices.

The changes will be reviewed in 30 days, ASIC said yesterday.

Japan, Hong Kong

``In the current climate and, in light of the actions taken by other regulators, we need a circuit breaker to assist in maintaining and restoring confidence,'' ASIC Chairman Tony D'Aloisio said in the statement. ``These measures are necessary to maintain fair and orderly markets. Because of the relatively small size and the structure of the Australian market, it is necessary to extend the prohibition to all stocks.''

In Japan, the Financial Services Agency said it was not considering restricting short sales at the moment.

``We are monitoring the developments in other markets,'' an official who declined to be identified said. ``Japan has always been stricter in terms of short-selling rule enforcement, so we aren't experiencing the same problems as elsewhere.''

To discourage short sellers, the FSA introduced in 2002 a so-called uptick rule, which allows investors to complete sales only when a stock's price rose in the previous trade, after the Nikkei 225 Stock Average dropped to an 18-year low.

In 1998, Hong Kong reinstated an uptick rule, in which investors can't short a stock below the most recently traded price.

`Wholesale Crash'

Australian Treasurer Wayne Swan said the nation's new rules on short selling were the toughest in the world.

``We have gone further than everybody else,'' Swan said in an interview with Sydney Radio 2UE today. ``Given the actions in the other markets, there was a window open that exposed our relatively small market to the predatory activity of short sellers.''

Macquarie, the nation's largest investment bank, climbed 6.4 percent to A$38.10, paring its slide this year to 50 percent.

Babcock, which copied Macquarie's model of using debt to buy infrastructure assets for its funds, soared as much as 126 percent. It last traded 72 percent higher at A$1.37, cutting its loss this year to 95 percent.

Allco, which along with Centro Properties Group posted Australia's biggest loss in five years last month, surged 29 percent to 15.5 cents. The infrastructure manager has dropped 98 percent this year.

``Short covering will artificially drive the market too high in the short term, potentially setting it up for a massive fall,'' Chirnside said. ``There will be a large rally today, perhaps between 8 and 10 percent, as short sellers try to cover their positions. But after that we face a wholesale crash of 1987 proportions on the downside.''

To contact the reporter for this story: Stuart Kelly in Sydney skelly22@bloomberg.net

Last Updated: September 21, 2008 22:34 EDT