Some thoughts on Short Selling...

OK, so I am not hugely knowledgeable about the pluses and minuses of selling short in the equity markets, but here are a few thoughts. Maybe they are legit, or, maybe they are lame and I need to be schooled on why I am wrong in my thinking.

Short selling is said to be beneficial because it increases liquidity in a particular equity. Liquidity is defined as the ease of conversion of an asset into cash. If I do not own a particular asset than I should not be able to convert it into cash in the first place. Simplistic logic, yes, but here I believe simple reigns.

Taking an equity position in a company is becoming an owner of the company, and getting somewhat of a say as to the leadership and hence, the direction of the company. A short selling preempts that ownership, a short seller is NOT an owner...he is the antithesis of ownership.

Who really benefits from the short selling of an equity? It appears that anti-owners and market makers are the beneficiaries. Market makers get to continue selling shares at whatever spread they can muster when otherwise daily volume in a stagnant company might decline by a significant amount.

Proponents of short selling say that it helps find the true value of a company. I say it is to a company what mark-to-market accounting has been to the banking industry of late. Banks complained that having to mark-to-market some of their assets that they had no intentions of selling impeded their ability to maintain healthy balance sheets. Hmmmm? So, if I have no intention of selling my shares of a company, why should someone else be allowed to borrow them and sell them and undermine my balance sheet? It is the exact same logic. My shares are worth to me what my cost basis is, and allowing them be be taken and revalued by a non-owner is absurd....

...what if this were allowed in say, the home real estate market. In a neighborhood a couple of houses are for sale, the vast majority are not for sale. The average price in the 'hood is 100K. The owner of one of the For Sale homes is desperate to sell and accepts an offer for 95K. Short sellers, sensing blood in the water, begin shorting the other residences...95K, then 90K, then 85K....selling homes that are still occupied by folks with no intention of moving, but now living in a home that had been revalued by someone with no ownership in the area. A manipulation of price.

Speaking of manipulation of price, that is my next beef with shorting. It is widely believed that a consorted effort, if not an orchestrated effort, by hedge funds and other large investors may have been behind the voluminous decline in the financial sector stocks. And, with no up-tick rule in place, their effort was relatively smooth with hardly a bump in the downward slide.

Currently there are hearings going on regarding short selling...

informal inquiries...are being conducted quietly over a rash of complaints by investors who say losses they've incurred are a result of deliberate shorting through unregulated hedge funds. link.

But when you've had guys like this running the SEC in the manner that he ran the SEC it is no wonder that we had the unscrupulous crowd running wild on Wall Street.