Who Gets Harmed When You Ban Short Selling?

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Short selling is not evil, and it needs to stay in place if we want to have free markets. Short selling is a wonderful gift to liquidity and efficient price discovery. Markets thrive the more diverse the holders and traders of securities are. It’s what provides efficient pricing and liquidity for all investors.

Consider the plight of the mob of Tesla short sellers. In the seven months following the fateful brick through the cybertruck window, Tesla sold 650,000 cybertrucks that hadn’t even been made. The argument that short sellers can capitalize on high-profile bad news is invalid.

Elon Musk is sarcastic or self-serving. Short sellers might be the only thing distancing him from being worth more than Jeff Bezos (well, that and real economic value). At least a few of the 635,000 thousand people who liked his tweet, though, are probably thrilled that Citron discontinued short selling research this morning because, to them, short selling is evil and ought to be banned.

Without broad price discovery, the economy will suffer from less efficient capital formation. The value of short selling is going to be straightforwardly displayed in the next couple of weeks. GameStop (GME), which as of the posting of this article, surpassed United Airlines and 106 other companies on the S&P500 in market cap, is attracting retail investors who do not know what they are doing and want to get in on the fun.

GME is going to crash. With all the short sellers squeezed out of their positions, the stock price has become meaningless.

Many retail investors will not understand this and will buy GME at 336.19 (its price at 11:03 AM on January 29). When you bar short sellers (or discriminate against any class of market participant), retail investors are the victim. They are subject to a form of phony price inflation.