July 24, 2008
Markets should be limited to organized buying and selling of real goods, i.e. existing stock. Naked short selling is the selling of phantom stock and as such has the potential for massive disruption of the markets. At a minimum, it has the potential for market manipulation. This is a basic fact.
As an individual investor, the permissiveness toward naked short selling gives me far less confidence in the markets and in the government agencies we trust to regulate the markets. Are our regulators protecting the whole economy and public at large, or a few highly-capitalized funds and traders? I fear that someday we will all look back on a major market disruption caused by naked short selling and wonder why no steps were taken to stop it. It will be one more case, among many, of belated after-the-fact regulation.
The stabilization that appears to be happening as a result of the limited regulation of naked short selling is ample evidence that naked short selling should be banned entirely. More fundamentally, whenever we permit pure fantasy in our markets, the markets eventually suffer, and we should try to avoid future problems by banning naked short selling now.