Ban On Short-Selling Is Short-Sighted

Short-selling or "shorting" is the practice of selling a financial instrument that the seller does not own at the time of the sale. Short selling is done with intent of later purchasing the financial instrument at a lower price. Short-sellers attempt to profit from an expected decline in the price of a financial instrument. In general, people think of investing as buying an asset, holding it while it appreciates in value, and then eventually selling to make a profit. Shorting is the opposite: an investor makes money only when a shorted security falls in value.

Short sellers are widely regarded with suspicion because, in the views of many people, they are profiting from the misfortune of others. Some businesses campaign against short sellers who target them, sometimes resulting in litigation.

However, the people advocating a ban on short selling ignore that fact markets by defination go up and down. Markets are not "meant" to always go higher. Thus, short-selling is an integral part of any market. Also, securities that have been sold short have to be "covered" i.e. bought back. Thus, in rapidly falling markets one of the most important "buyers" are short sellers who are trying the buy back the securities they have short-sold.

Importance Of Short Selling

1. Restrictions on short-selling disturbs the markets price discovery mechanism. Analysis of market data has proved that shocks in which short positions were present had lower impact cost(defined by the difference between the bid and offer prices) compared to similar stocks with no short positions.
   
2. Many trading strategies like "convertible arbitrage", "statistical arbitrage" (or "stat arb") or the typical "long-short" strategies depend on having the ability to short-sell. Noted investor Warren Buffett believes that short sellers are useful in uncovering fraudulent accounting and other problems at companies.
3. Viability of the options market (without shorting, an options desk cannot run a delta neutral book - it has nothing to do with being bearish or bullish on the stock in question)
4. Mutual Funds, Pension Funds and other institutional investors have stock loan desks which lend stock to short-sellers to earn return on idle securities
   

Anyone who seriously thinks that the cause of the current crisis is the actions of evil and manipulative speculators lacks the insight and knowledge to be allowed anywhere near the regulation of financial markets. Short selling may well exacerbate existing problems, but it certainly was not the cause.