Short Sellers are the Modern Day Equivalent of Pirates

Short Sellers are the Modern Day Equivalent of Pirates: It is Time to Regulate Short Selling and the Use of Automated Trading Algorithms to Manipulate Financially Sound Small Cap Companies.

Clinuvel is a prime example of a strong, profitable company that’s been subjected to relentless stock price manipulation via heavy short selling despite its outstanding financial health. With eight straight years of profits, zero debt, and solid cash reserves exceeding 180 million dollars. The company’s unique drug, Scenesse, is FDA-approved and successfully treats rare genetic conditions, providing not only a steady revenue stream but also a promising pipeline for future treatments. Companies like Clinuvel should be valued for its strengths—not artificially dragged down through speculative, manipulative practices. This isn’t an isolated case but part of a worrying trend that distorts true company value and undermines investor confidence. Although many of the manipulative tactics used against Clinuvel are already illegal. They are not enforced. I believe it is time for new legislation to regulate short selling and the market manipulation of financially sound small cap companies.

The primary argument for short selling has long been that it provides “market price discovery.” But let’s be honest—does the market really need short selling to assess the true value of a company? If an investor lacks faith in a company’s outlook, they can simply opt not to buy shares or to sell existing holdings. There’s no essential case for short selling of financially sound companies that are actively growing and innovating. By targeting small companies in good financial standing, like Clinuvel, short sellers can drive down share prices without reflecting the company’s actual worth. This creates a fictitious, harmful market based on manipulation, not merit.Short sellers can wield enormous influence, encouraging selling frenzies and panic through tactics like negative rumor-spreading, initiating so-called "short and distort" campaigns, announcing bogus 100,000 share stock dumps in boiler room forums, relentlessly attacking the credibility of management, and pumping fictitious liquidity into tightly held stocks by placing aggressive sell orders at artificially low prices. For companies in strong financial shape, this tactic is even more damaging, since it can detract from their well-deserved reputations and cause unnecessary volatility in their stock price. Over time, it can even dissuade new investors from putting their money into genuinely solid companies, fearing unpredictable drops driven by manipulators.

Studies show that stocks with high short interest tend to experience lower returns, even when these companies are fundamentally sound. For instance, a 2019 report from the US Securities and Exchange Commission (SEC) noted that companies with high short interest relative to their market cap faced greater price instability, especially during times of broader market volatility. In effect, short selling can create a vicious cycle that undermines investor confidence. Research from the CFA Institute indicates that excessive short selling can also discourage long-term investment. When investors fear that short sellers may quickly undercut their newly invested capital and holdings, they are less likely to invest in smaller companies, which ultimately deters investors and hinders market diversity and innovation.

One option would be an outright ban of short selling of financially sound small cap companies. Perhaps an even better alternative to an outright ban would be tighter regulations on short selling for small-cap companies or more stringent disclosure requirements for those with large short positions as well as those engaged in trading via automated trading algorithms. Currently hedge funds and market manipulators can attack financially healthy companies in the shadows with virtually no disclosure requirements. The regulatory agencies basically let the short sellers police themselves. This approach would draw the cockroaches out of the shadows and curb abuses while maintaining some liquidity benefits.

Remember, the stock market doesn’t actually need short selling. The industry can thrive—and be healthier—without a mechanism that permits manipulation under the guise of “price discovery.” At a bare minimum, we need measures in place to protect fundamentally sound companies from using shorting to create undue speculative attacks. Banning short selling of financially robust companies or requiring full public disclosure of those with large short positions would be a solid step toward restoring trust and encouraging more stable investment based on fundamentals, not fear or manipulation. To foster a healthier, more stable investment environment, we must close the door on these practices that prioritize manipulation over merit. For the future of innovation and market integrity, it’s time to shed light on and limit short selling of fundamentally sound companies and let performance, not speculation, dictate value.