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Should we abolish shorting?



January 21, 2008 – Comments (2) | RELATED TICKERS: CALM


That's what a reader asked recently in an email sent to me, Jim Cramer, and Lord knows how many others. Here's the reasoning:

"All investors will be  on the same side and the reason I am sending this email is when the stock market goes down you see thousands of nasty bashers try to attack every single stock on Yahoo message boards ... GOD PLEASE HELP US BUILD AN IDEAL SYSTEM FOR AMERICA."  

Really, really bad idea.  Here's why:

1. When we're all on the same side, the market becomes perfectly efficient instead of mostly efficient. And then no bargains are left for any of us.

2. When everyone's a bull, fraudulent firms don't get held to account. Thank God for the skeptics who have the courage to look under the hood.

3.  When bashers attack unreasonably -- yes, they sometimes do -- they offer a gift to patient investors. Check the Reg SHO list and you'll see what I mean. Cal-Maine Foods has doubled over the past year. 

I've no doubt that we can always do better in protecting individual investors. But asking us to stop shorting, or to be "on the same side" of every trade, isn't the answer. Not even close.

Of course, that's just my opinion. What do you say? 

2 Comments – Post Your Own

#1) On January 22, 2008 at 1:35 AM, Tastylunch (28.71) wrote:

I don't think shorting should be abolished. The overall economy benefits from "creative destruction" that shorting can sometimes start or accelerate. If Shorters bring to light unpleasant truths about fraudlent or dieing companies then they are doing society at large a service in my opinion.

I think most people mainly dislike the ides of shorting because it seems rude as the shorter profits at others expense pretty directly. 

So yeah I agree, as long proper safeguards preventing abuses are in place.

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#2) On January 22, 2008 at 3:58 PM, jericson (99.68) wrote:

Um...  Point #1 seems not to be true to me.  Rather, shorting increases market efficiency rather than decreases it.  Certainly, I can't see how it could become "perfectly efficient".  On the other hand, hyper-inflated prices would be theoretically more likely since the downward pressure of shorting would be removed.  (Not that shorting works all that well either.  The current regulations are too restrictive in my opinion.)

 If shorting were abolished, that wouldn't mean it would go away.  There are plenty of other ways to take a bearish position, but not so many are available to a retail investor.

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