April 10, 2009
As an active investor, I do not welcome any form of restriction on short sales. Any such intervention seems little more than a short-sighted and symbolic psychological sop. The argument that short-selling can be used to manipulate stock market pricing applies equally to long-buying. Such manipulations are, at best, short-term in nature. The fundamental value of the stock will always push the market back to realistic valuation.
Any block on short selling of stock is easily circumvented by using derivatives to effectively short a synthetic stock. Because of the arbitrage that would be created between such synthetic stock and the actual stock, such 'synthetic short selling' has the same net effect on the underlying stock, as market makers adjust their prices to maintain equilibrium between the prices of a stock and the derivatives for that stock.
Any interference in the market creates exploitable inefficiencies and asymmetries, and can not possibly have the intended salubrious effect. Medicine has come to rely on Results-Based decision making, in which any change to accepted practice is backed by statistical models that demonstrate a quantifiable and objective cost/benefit tradeoff. The SEC should require similar statistical modeling that establishes an objective, measurable benefit from any proposed interference in the market. Implementing market interventions on the basis of how people 'feel' about them is every bit as foolhardy as treating cancer with some concoction that 'feels' like it ought to work.