You write this as if uncovered shorting is allowable in...

You write this as if uncovered shorting is allowable in Australia. Its not.

The shorters (or short funds) need to source their shares from somewhere and a MSCI small cap linked fund is a pretty awful candidate. Major index linked funds tend to have most of their money invested into large big cap companies. An index like MSCI small cap would tend to have smaller amount of funds allocated to them. The fund would also have its shares spread across literally thousands of companies around the world. I suspect their admin effort is spent maintaining their thousands of share holdings, not lending out shares to shorters. Core's weighting in the MSCI small cap was 0.005048%. I really can't see it being likely that a fund would be interested in shorting and the administrative work that comes with it for a company that represents 1/20,000th of the fund. That sort of strategy would blow out your management expense ratios making with negative implications on staying in business.

Even a MSCI small cap linked fund were interested in supplying shares to shorters, consider a good sized MSCI linked fund with $10b under management. That fund would have $0.5m invested in Core. Even if they supplied the whole lot so a shorter, they could only supply around 2.5m shares. Shorters have found sources of 271m shares, so they would appear to be funding them from somewhere else.