Short selling has long been vilified even though theviews of short sellers have often been vindicated.However, the converse is not true when asset pricesare rising, even if they are unjustified by thefundamentals; there is little call against those that havebeen buying securities in an exuberant manner. Bothbuyers and sellers should be able to express theirviews without impediment. Identifying one party asunwelcome encourages regular mispricing in the future.The prospect of placing constraints on short sellers iseven more worrying when one considers theasymmetric risk and return trade–off theseparticipants face; the maximum profit potential is100% and the maximum potential loss is infinite,whereas the opposite applies to the unleveraged longposition. If restrictions on short selling are to bepursued then logically these should be matched bylimits on buying securities. We favour no suchrestrictions on either party.
1. Short selling contributes to price discovery and greater liquidity. 2. Capital and its associated risks would be mispriced without short selling. 3. Short selling helps in price discovery. Arbitrageurs benefit from pricing discrepancies (inefficiencies); therefore, arbitrage activity will be higher in markets with no restrictions on short selling.
SXY Price at posting:
20.5¢ Sentiment: Buy Disclosure: Not Held
