September 19, 2006
In a truly free market economy, there would be no limitations on short selling, which would lead to an efficient market where all selling-interest is reflected in the price of a security. Instead, what we have today is a market with strict limitations on short selling, which results in the temporary overpricing of securities and mom-and-pop investors losing money. In the days prior to the implementation of Reg SHO, I found there to be less volatility in thin stocks. I also used the due diligence published by short sellers on message boards to help me in evaluating a stock. Since the implementation of Reg SHO, detailed due diligence published by short sellers seems to have all but disappeared from message boards, and volatility in thin stocks has increased. Further restrictions on short selling would lead to a less efficient market.
Pump and dump artists and CEO's of poorly run companies have conducted a successful PR campaign that has blamed almost any decline in any stock on short sellers. Unfortunately, the SEC has also bought into this PR campaign and is once again trying to restrict short selling in the markets. The market is awash in pump and dump scams. It is mystifying how the SEC largely ignores that rampant problem and continues to spend valuable resources on restricting short selling. I have yet to see any data indicating that the short sellers represent a significant problem in the market.