Short sellers in the market serve a purpose. They sniff out over valued stock and help prevent bubbles from being created. Generally, it is a good thing, when done legally.
What the author fails to explore here is illegal naked shorting. Traders selling shares that don't exist and that have no intention or ability to deliver. Trades that never settle. In effect, stealing shareholder value right in plain sight.
What the author fails to explore here is illegal naked shorting. Traders selling shares that don't exist and that have no intention or ability to deliver. Trades that never settle. In effect, stealing shareholder value right in plain sight.
Correct. Any crook would love to be able to sell a non-existent item, receive payment for it, fail to produce it, and yet go unpunished for the act. This goes on thousands of times a day on Wall Street.
That's the standard philosophy, but in reality, the existence of so many major market bubbles has pretty much disproved it. There is another side of this coin - since logically "smart" shortselling would (and does) tend to occur near the supposed top of the market, the short squeezes actually move the market higher and create larger and longer tops than anyone expects, with more money moving from the sidelines into the market, not the other way around. You often hear short sellers warning about the "market's irrational exuberance" years before the parabolic ascent and crash occur - that's a lot of money thrown at the market just when it's most expensive to do so and when "this time it's different" euphoria just starts to set in and people throw money at the market. In other words, The market can stay irrational longer than you can stay solvent. - John Maynard Keynes.
Bears and Bulls get mauled because short selling often extends and prolongs the market (or stock's) top, and what could have resulted in reasonable and quiet deflation of the market often results in a crash that is significantly harder and destroys more of the capital than otherwise would.
Something to think about... And, no, I am not in favor of "banning" short selling, or derivatives etc. They are just useful financial tools and can be used conservatively or aggressively, without all the damage that all too often we see they can and have been used to cause. To paraphrase, "financial instruments don't destroy capital; people, who are abusing them, do". We should see to it that they cannot. The same way we do not ban aviation or car travel, but try and take measures to prevent them from being used as guided missiles or weapons of mass destruction.