May 5, 2009
It is my opinion that increasing the restrictions on short selling is unnecessary. For starters, the SEC was the agency that originally determined that restrictions such as the uptick rule were unnecessary and has stated that the evidence to date does not demonstrate that having the uptick rule in place would have protected investors in the recent market downturn.
Beyond the SEC's own findings, I fail to understand how a market in which buyers and sellers set the prices themselves would benefit from skewing the playing field to favor buyers. The primary purpose of the stock market is to provide liquidity for investors and both buyers and sellers are required to maximize the liquidity (and value of the market) to participants. Given that short selling increases the liquidity to the market, there is no logical reason why restrictions are necessary. Other arguments made in favor of restricting short selling seem to embrace the belief that the significant downturn in the market could have been mitigated if regulations such as the uptick rule had been in place. I would argue that the market downturn could have been avoided if investors had confidence in the value of the companies' assets and future cash flow generation, which is something that cannot be controlled by the implementation of short selling restrictions. Specific companies were targeted by short-sellers because those targets were unable to provide investors with tangible evidence or at the very least convince them that they were worth more than the price in the market. The collateral damage to valuations of other companies as a result was likely due to leverage as opposed to unabated short-selling. In sum, investor confidence should be highest when all opinions are fully reflected in share prices. Restricting the impact of bearish opinions on the market simply delays the process and detracts from investor confidence.
Finally, no one ever suggests that buying should be limited to certain conditions even though the fallout from over-exuberance on the part of investors has clearly led some individual investors to avoid the markets. If we don't see a reason to limit buying, why should there be a discussion around limiting selling.