April 10, 2007
Poorly regulated shorting makes it possible for any large hedge fund to destroy small companies.
Market makers and brokers claim that shorting is a legitimate way to "provide liquidity". That would only be true if there was real transparency. To prevent abuses, we need to apply today's technology to make sure that adherence to all legitimate rules governing shorting is 100% guaranteed by the market mechanism, not by blind faith in anyone's morals.
Here is what we need:
1) Every short trade and every short cover needs to be identified on the ticker. This would make it immediately obvious if the downtick rule is violated, and would allow item 2 below:
2) Total number of outstanding shorted shares need to be tallied in real time with every single trade. Other than accomodating potential abusers, there is no reason for the current monthly tally and then further delay in publishing the amount of total short interest. This would prevent abuses like shorting more shares than available to borrow.
Also, this would allow a mechanism to prevent proxy vote inconsistencies where both real and shorted shares are voted on important corporate matters.
The current system of secrecy is favored by crooked institutional investors who want to maintain the upper hand against legitimate investors.
Again, if shorting is supposed to be only a legitimate bet in the opposite direction of a long trade or as a mechanism for legitimate hedging transactions, there is no possible justification for keeping it secret. We need the transparency for EVERY SINGLE TRADE.