Is Wall Street Broken Part One : Put some clothes on those “Naked Shorts”

The shorts got hammered by government edict banning shorting financials. These types of moves have historically only given markets a short term boosts followed by prolonged periods of decline. The 1930 showed markets don’t respond well to irrational government interference and these actions often have the unintended consequences of lessening confidence.

Shorting is as necessary for the proper functioning of markets as going long. By banning shorting you are once again simply rewarding more bad corporate and regulatory behavior. I do think however the ability to do “naked shorts” should be significantly curtailed except for market makers and floor brokers who need to use this activity to insure orderly markets. The reason ‘naked shorts” should be eliminated is the simply logic that the action of shorting a stock you have not borrowed seems to alter the capital structure of the target company, making shorting a self fulfilling prophecy.

In order to restore confidence in US equity markets US regulators should 1) restore the “uptick rule” 2) eliminate “naked shorts” and 3) Immediately restore market players ability to legitimately short any and all equities.