Don't Sell Short Selling Short

Robert Sloan, a managing partner at S3 Partners, is the author of Don't Blame the Shorts (McGraw-Hill), which defends the practice of "short selling." Short sellers borrow stock and sell it, hoping to buy it back at a lower price. Going short lets you profit from downturns, and it is often restricted or banned during them, as it was in late 2008. reason asked Sloan to list three reasons short-selling bans are a bad idea.

1 Our capital markets are the best because they reflect the greatest spread of information. Short sellers spread dissenting information about the prospects of companies when the companies want you to think everything is great. Short sellers are in the grand political tradition of dissenters.

2 A ban on short selling is like a ban on capital formation. The cash people get for shorting a stock goes right back into the commercial paper market. It's a ban on short-term commercial paper liquidity.

3 Short selling in equity trading is a hedge against whatever risk you are taking when your other positions depend on prices rising. Restrict that, and you just make it easier for people who already have capital but make it harder for the likes of pension funds, which always need to be able to satisfy their liability streams no matter which way the market is going.