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Morgan Stanley: Exploding the Short-Seller Myth

Sorry, accidentally exited preceding comment. To continue:

The increased price volatility of a stock (associated with naked short selling) has particular implications for bank stocks, which are inarguably more vulnerable to rumor-mongering than other types of issues. A "run on the bank" is as "old as the hills", and nothing in the way things are done today has changed that. Therefore, concerted short-selling of bank stocks will, justifiably, always raise the concern of market manipulation, as is evidenced by the comments here, and (I suspect) by the actions of the SEC this week.

By the way,

Morgan Stanley: Exploding the Short-Seller Myth

There is obejctive research on the matter as well as years of marklet experience. They do not always coincide.
Christopher L. Culp, an adjunct professor of finance at the University of Chicago’s Graduate School of Business, wrote a paper early this year in the economics of naked short selling. Here is a link to the faculty bio web page, and that will lead you to the article:

www.chicagogsb.edu/fac...

In brief, the effect on supply and demand of naked short selling is to increase marked volatility, much like the effect of margin leverage on an account, or on a position on the SML security margin line. It does not, per se, lead to a market pricing inefficiency.

What the article does not address is behavioral finance, by which I mean the age-old practice of making a "run on the bank". I think what several people here are alluding to is that this increased volatility of the price of a bank stock, subject to heavy naked short-selling, price cuass a market panic, and if targeted by large hedge.