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The mere fact that there is a finite number of shares of a particular compay outstanding is not, in my view, a valid economic argument against short-selling.

You and I could agree that I will sell you a mint-condition '71 Buick GS Skylark delivered on a certain day for a certain price. I do not own such a car (I wish I did). I did not consult any of the real owners of the cars when I made my contract with you.

However, if I fail to deliver that car to you, perhaps because I tried to obtain one and found it was in too short a supply, and end up breaching my contractual obligation, there is an adequate remedy in the legal system - I owe you money equal to the benefit of your bargain.

The principle is the same with a finite number of shares of stock - if I sell shares I don't own, and fail to deliver, I owe my counterpart money damages.

So in my opinion we should move beyond the question of "is short-selling shares that have a finite number something bad in principle", and on to the real question, which is one of credit exposure. I think the SEC has added to the confusion by buying into the term "naked short selling" instead of focusing on the "fail to deliver" terminology.

The institutions who are exposed to hedge funds who have failed to deliver promptly have a self-interest in managing their credit exposure. So the starting point should be to investigate the situation and monitor it, and not immediately adopt some radical rule change based on faulty economic thinking. I think the SEC Market Reg is about right in how they are approaching this.

And if anyone doesn't think people in the SEC Enforcement Div do not love to nail some wall street skins on the wall if they can find anyone breaking the rules, well I guess I just disagree.

SirJohn -- I make no argument whatever against short selling. Naked short selling, however, is fraud pure and simple.

I'm not fond of the term either, and would prefer ''willful failure to deliver'', but I daresay that's not nearly so sexy, eh? In any case, I'd really rather have this matter dealt with administratively and by rule, rather than dump it into already overburdened courts, enriching lawyers thereby.

FReegards!

What you are describing, when you get rid of the fancy terminology that makes you feel better, is fraud. Plain and simple. Just because it has become more prevalent doesn't make it right. It's like looting --"hey, everyone else was doing -- even the COPS!!"

Psssht.