August 24, 2009
Regarding Short Sale Restrictions.
We believe short sale restrictions should be lifted.
Short sales are beneficial in that they serve price discovery. Short selling
has been blamed for running down markets, when most likely they merely uncover the true market price more quickly.
Uncovered short sales are really quite similar to futures contracts in the absence of an underlying asset and any arguments for short sale restrictions should thus hold futures markets as well.
A danger of short sales is that they introduce counter-party risk in the same way as futures markets. The price of the underlying asset changes (in this case the stock price) and the value of the trade changes requiring some equivalent of a margin call. but if sophisticated financial agents are familiar with the rules and the dangers and they enter the contracts voluntarily, then certainly it is not the business of the SEC or other regulators to restrict such trades.
Sincerely, Mark Nielson, Ph.D.