Short selling

When people discuss short sellers, they sometimes argue that they serve a "policeman" like function in the economy, pointing out companies that have significant problems earlier than others would. Now this may have some validity but it is basically the same argument that you could make about bank robbers, they point out the banks with the worst security.

Short sellers do it for the money. I'm not saying this is a bad thing, profit motivation is what drives capitalism after all, but lets understand that no one sells a stock short as a public duty. They do it to make money.

There can be many arguments related to whether short selling is a good practice. There is however one thing that has to be carefully watched. As we have seen the development of funds that are in many ways not subject to regulation that manage large amounts of money we increase the possibility of individual stock manipulation.

Now, if hedge fund managers as a group take the same position on a stock we can see significant moves. Buying and selling real shares has a impact that moves with the fundamentals of a stock. However, if you have significant short selling in a stock, the simple fact is that you increase the number of shares being sold, beyond the actual number of shares owned. Yes at some point the short sellers have to cover their positions, but in the meantime, it exerts a downward pressure that wouldn't exist if there were no shares available.

Clearly, this can be played and I have no doubt that is is played on a regular basis. Society has to decide if that sort of behavior is what we want to see in our market exchanges.