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First, let me state right up front that I am an unabashed supporter of short selling. I have shorted in the past and will do so again in the future. (I am restricted from shorting stock at my place of employment but am able to short ETFs.) Shorting is not only a legitimate practice, it is a necessary one. Accusing shorts of being unpatriotic is a ridiculous assertion propagated mainly by the pitchfork crowd and vested interests, in my opinion.

Having said that, the cacophony arising from some regarding the reinstatement of the uptick rule is approaching hysteria. You would think, given some of the comments regarding the re-imposition of the uptick rule, communist hoards had arrived at America’s shores, ready to destroy capitalism, baseball, mothers and apple pie as we know it.

Those saying that re-instating the uptick rule is somehow a war on the shorts fail to appreciate that exchanges have all sorts of rules designed to slow markets down, such as circuit breakers on the stock exchange and lock limits on commodity futures markets. Such limits are an implicit recognition that panic and mania are destabilizing to markets. Financial market destabilization can affect the economy in general. George Soros is correct in that perception can become reality, and frenzy in the financial markets can have vast consequences in the real economy. (Soros has also explained, correctly in my opinion, how easy it is wreck stocks through the derivatives market.)

Bubbles are enormously distorting events that misallocate resources in the economy. However, those making the argument that shorts should be given carte blanche seem not to understand that grossly undervalued assets are also highly distorting to the economy. Just as bubbles allocate capital towards ventures which are likely to be highly uneconomic, busts allocate capital away from opportunities that are likely to be highly economic. Both booms and busts misallocate resources within the economy, bubbles by creating an artificial demand that otherwise would not be there, and busts by creating a lack of demand that otherwise would be there.

Surely, those who are against short-selling restrictions are just as in favour of limiting the distortions in the economy caused by busts as they are of those caused by booms. And surely, if they argue that making it easier to short dampens bubbles, they also must recognize that making it harder to short dampens busts. So what is the big deal that we make it slightly harder to short stocks?

Frankly, I have no idea if the uptick rule will make it harder to sell stocks short. However, the shrillness of this debate has gone over the top, from both those advocating and defending short sellers. This is a time for rational discussion and emotions to be put aside.

Source: Uptick Rule Debate Needs Some Clear Heads