Well, in the spirit of “It’s not whether you will you win or lose, it’s how you place the blame,” we have this from The Economist:
This month America’s Securities and Exchange Commission (SEC) banned “naked” shorting—the sale of stock that investors do not yet have in their possession—of the American-listed shares of 17 investment banks as well as of the country’s mortgage giants, Fannie Mae and Freddie Mac. Last month Britain’s Financial Services Authority (FSA) introduced a new disclosure regime for short positions in companies that are selling new shares. Both announcements bore a whiff of panic: they were made during steep falls in bank shares and the fine print was tidied up afterwards. Both were accompanied by the rattling of regulatory sabres. The FSA growled that “market abuse” could explain the “severe volatility” of shares. The SEC thundered that “false rumours can lead to a loss of confidence”. It has reportedly fired off more than 50 subpoenas, largely to hedge funds.
Please. Short sellers do so because they think the price is going down, not because they think they can manipulate the price. After all, it’s a hell of a lot less risky to buy a stock and talk up the company than it is to short the company and talk it down. When buying a stock, your loses are limited to the purchase price, and your potential gain is unlimited. When shorting a stock, your gains are limited, and your potential loses are not.
Rather than driving a stock price down, if a short seller guesses wrong, he will usually buy back quickly to cover the short position and cut his loses — further driving up the price. If, however, he guesses correctly, and the stock price falls, he will, at some point, buy to cover his position and take his profits. (Remember, his profits are limited, so it does not pay to stay in a short position for a long time.) This creates a buffer for the stock — if the price falls considerably, the short-sellers will buy out of their short positions, and stop the free-fall.
Short-selling does not drive down the price of a stock – losing money does.