June 2, 2009
Short Selling provides liquidity to financial markets.
The SEC imposed rules surrounding markets and price movement should not provide favor to either the longs or shorts, but they should be position netural.
As an example, if the SEC desires to implement a circuit breaker of 10% for price declines....then they should also be considering an "up limit" circuit breaker which would kick in when a security has moved up 10% in price. If the SEC is considering a up-tick rule to sell short, then they should also consider a down-tick rule for those that want to buy long.
It sounds silly, but when you think of the absurdity of limiting moves to the downside - shouldn't we also be considering protecting the shorts on upside moves, instead of vilifying them by blaming them for market declines. It's not shorts that caused the moves to the downside. It's the lax regulations that permitted excessive leverage that caused the shorts to execute short trades in hopes of prospering. The problem was the leverage, not the shorts.
What's more important, in my opinion is disclosure. Funds should be obligated to report long/short positions in stocks and derivatives. Markets are meant to be pure reflections of supply and demand. Rules should not be implemented to favor either longs or shorts. The price should accurately reflect the point at which willing buyers and sellers are content to settle trades. Imposing price restrictions and limitations will not accomplish the objective of creating free and uncontrolled capital markets.
The SEC should force disclosure of fund and hedgefund longs and shorts on a quarterly or monthly basis. This would help participants in the marketplace to make better, more well informed decisions about valuation of securities which in the long run, will promote more efficient markets.