* Target short-selling after share offer announcement-sources
* New rule similar to Regulation M adopted in U.S.-sources
* Speculative short-selling seen by some as disrupting market
* Won't address real problem of insider trading -analyst (Adds analyst comments, details)
By Noriyuki Hirata
TOKYO, Nov 11 (Reuters) - Japan's top bourse and financial regulator are considering rules to curb excessive short-selling by investors looking to profit by driving a stock down in the run-up to a share offering, three sources with knowledge of the matter said on Thursday.
The move comes amid growing scrutiny in Japan on short-selling and other speculative trades before and after the announcement by companies of new share offerings, including the recent launch of a probe into insider trading.
The announcement of a new share offering often triggers heavy selling as investors factor in the dilution of value per share, and some investors look to profit by selling the stock short on the news and then buying it back after a steep fall.
The Tokyo Stock Exchange and Financial Services Agency are considering a rule similar to Regulation M in the United States, which prohibits anyone from taking a short position during a restricted period after the announcement of a public offering and then buying that same stock in the offering, the sources said.
The sources were not authorised to speak publicly about the matter.
The rule is aimed at preventing short-selling -- where investors sell a borrowed security with the aim of buying it back at a lower price -- that could artificially depress a stock just before a company prices its offering, thereby reducing the amount of funds it can raise.
But it would not deter someone from acting on inside information before the announcement of a share offering, says MF Global FXA Securities Strategist Nicholas Smith, who has recently published research on the issue.
"I'm looking at it as a smoke grenade," Smith said, referring to the possible introduction of a Regulation M-type rule in Japan. "It's trying to get people to look the other way and take their eyes off the real problem. The real problem is insider trading."
Last month the TSE said it was looking into a spate of investor complaints about heavy short-selling ahead of new share issues. Japan's securities watchdog, the Securities and Exchange and Surveillance Commission (SESC), has been interviewing brokers about suspicious trading around public offerings.
Analysts say the emergence of such allegations will give investors the impression the Japanese market is not an even playing field and could further depress an already underperforming stock market suffering from sluggish volumes.
MF Global's Smith has published research looking at 59 equity offerings in Japan this year. He found those stocks underperformed the benchmark TOPIX by an average of 3.3 percent in the 14 days until the day before the announcements.
The TSE and regulators are proceeding with caution on the matter, worried that any new rules could impact volumes while also limiting the trading options of investors, who often short a security to hedge against a long position.
Some market players said the rule would be unlikely to have a big impact, noting that a ban on "naked" short selling -- selling a security without first borrowing it -- put in place during the financial crisis in 2008 had little effect on trade.
"Stocks that drop on financing news usually gain ground eventually if they become oversold," said Masaru Hamasaki, senior strategist at Toyota Asset Management.
"If investors can't sell stocks at appropriate levels, triggered by financing news, they might not fall (as much) but their gains will be also limited in the future. (Additional reporting by Emi Emoto, Taiga Uranaka, Nathan Layne and Aiko Hayashi; Editing by Michael Watson)