If a group of institutional investors are on the hook for 100% of the shares in a short sale, then they have to cough up $300 million collectively to cover their trades in a company that's really only worth $10 million. They're on the hook for a $290 million loss. But if the run-up from $10/share to $300/share is being driven by a million small operators who have been buying it up at $300/share and no one speculator owns more than one share, then each person is only facing a $290 loss while the collective loss would still be $290 million.
When you crowd-source chaos, this helps spread the risk considerably.
Yes, and now this is a new risk that investors will simply have to take into account before they decide that shorting a stock is, in their actuarial analysis, an acceptable risk.
The first people to encounter a novel risk like this are going to be unprepared, and that’s perhaps unfair to them, but life is not fair.