In Defense of Short Selling

Doug Kass gives us this morning’s must read slice of market history:

"Short-selling runs deep in financial history. Perhaps the first case dates to 1609 when the Dutch trader, Isaac Le Maire, targeted the shares of the shipping company Vereenigde Oostindische Compagnie (the Dutch East India Company). VOC was the first multinational corporation in history and had broad powers. Nonetheless, Le Maire, concerned about threats of attack by English ships, sold VOC’s shares short. After learning about Le Maire’s tactics, the stock exchange governing VOC’s trading banned short-selling (although the ban was later revoked).

In the early 1630s, the Dutch economy fell into a depression following a speculative peak in the trading of tulips. Again, short-selling raised the ire of regulators, many of whom saw it as magnifying the effect on the Dutch economic downturn. As a result, England banned short-selling outright.

Almost 420 years later – in the late 1920s – short-sellers warned of the consequences of speculation. But in the aftermath of the Wall Street crash of 1929, many blamed them and the uptick rule – which banned short-selling on downticks – was instituted (and stayed in effect until 2007). More regulation governing short-selling came into force in 1940, with a ban on mutual funds from short-selling (though that law was lifted in 1997). In early 2005, the SEC again sought to restrict the practice."

Interesting history . .  Thanks, Doug.

UPDATE: August 25, 2008 12:26pm

More from Doug:

Blame Game Is Dishonest
Doug Kass
08/25/08 – 11:59 AM EDT

This blame game is short on logic
Douglas Kass
FT, August 21 2008 20:02

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What's been said:

Discussions found on the web:
  1. Lloyd commented on Aug 22

    In most cases, blaming a short seller for bringing a company down is like blaming a tree for smashing up a car rather than the drunk behind the wheel. If I was a CEO on a roadshow, I would tell my bankers to set up meetings with people short my stock. Short sellers are natural buyers at some point so why run away from them?

  2. ben commented on Aug 22


    Thanks for the few Kass posts recently, I’m a big fan and unfortunately I have to visit in order to read him each week.

    You have to respect a guy with big enough balls to short Berkshire and actually make money on the short.

  3. Kfunck commented on Aug 22

    Just like to point out that right now on the front page is “Lehman Speculation Buoys Financial Stocks.” Surely the SEC will come down on these speculators destroying another company/commodity!

  4. marcello commented on Aug 22

    never understood why it is OK to sell somthing that you don’t own. WTF ? Can’t do that with houses or anythign else, so why stocks ? It makes no sense.

    n.b. I have no opinion whether or not short-selling is responsible for anything. It’s the concept itself that I find really stupid.

  5. Bob commented on Aug 22

    From the article, In July, Christopher Cox, chairman of the US Securities and Exchange Commission, announced a plan to curb improper (naked) short-selling. In doing so he has (de facto) attempted to limit the activity of short-sellers. .

    That’s quite the strawman he created and based the rest of his rant upon.

    I see no such connection (de facto or otherwise) between regular short selling and the improper naked short selling.

    Regular short selling is fine, so long as you have in your possession and subsequently deliver the articles you are selling.

    It is the naked short selling, i.e., selling with no intent to deliver what has been sold, that the SEC is going after. The fact that so many in the Wall Street realm and influence are squawking, and trying to equate the SEC’s actions with limitations upon regular short selling, means to me that the SEC must be on the right trail.

  6. AGG commented on Aug 22

    The operative word is “rule”. The selective enforcement policies of the SEC are a mark of third world mafia management style (LOTS of rules and laws on the books). If you are a player, you are home free. The problem for the “Home Free” types now is that even with impunity, the “honor among thieves” thing degraded to raw survival for a bunch of stupid, over leveraged, math wizards. The old offensive saying applied to people with handicaps really applies to these go-go greedy bastards; Hire the handicapped; They’re fun to watch.

  7. Mark E Hoffer commented on Aug 22

    all this talk of short-selling, naked, or otherwise, and no mention of the DTC. (?)

    brings to mind a quote, from 70+ years go, attributed to H. Ford: “If the American people undertood the nature of the system of Banking & Credit, there’d be a Revolution before the Morning”

  8. Click Broker commented on Aug 22

    Doug Kass is disingenuous. As a “fundamentalist” shorter with a longer term horizon, taking the time to locate stock before shorting should not be a problem.

  9. Vic commented on Aug 22

    If you want an excellent history of speculation I HIGHLY recommend Devil Take the Hindmost. The period mentioned by Kass is covered in detail in the book

  10. leftback commented on Aug 22

    The War on Shorts is about as misguided as The War on Drugs and all the other Wars the administration has waged.

    If a stock is in reality worth more than the current price, its value will tend to rise and short sellers will lose money, whereas it is only if the company is a worthless pile of shit, lies and deceit that shorts would ever make money…..

    BTW, if you like Lehman here, Hank Paulson has a lot of tulip bulbs to sell you.

  11. Paul Jones commented on Aug 22

    If short selling is convincing a stock holder to sell his stock and promising to reconstitute him in the future, there is nothing wrong with that at all.

  12. ken commented on Aug 22

    Short sellers are speculators.

    They add nothing of value to the process of price discovery.

    If the company is worth less than the current market price the market will take care of it through producing more sellers than buyers. Current shareholders will increase their selling and buyers will become harder to find.

    Speculators stepping into this process and selling shares they do not own does not add to the discovery of the ‘right’ price for the stock. The ‘right’ price will be discovered just fine without them. What they do however is increase the volatility of the price swings. This is not really a good thing for investors. It drives investors away from the market.

    Since the capital markets are better off managing affairs for the benefit of investors over speculators it is apparent to me that short sellers need to be curbed.

    I think that several changes should be made.

    Firstly, no fiduciary or trustee of a pension fund, trust department, mutual fund, etc should be allowed to lend securities purchased for the benefit of another for the purposes of them being sold short by the borrower.

    Secondly, all short sellers should be required to have the borrowed securities ‘in hand’ prior to shorting them.

    Thirdly, the uptick rule should be reinstated perhaps on a sliding scale depending upon the price of the stock. With todays computer automated trading that should not be a problem to implement.


    BR: YOU WROTE: “If the company is worth less than the current market price the market will take care of it through producing more sellers than buyers.”

    EXACTLY. And part of the price discovery mechanism includes a profit incentive for that — which is short selling.

    Too many people want a one way market, and oppose anything that makes the prices of bad companies go down.

    Remember, it was not the traditional wall street research that uncovered the frauds at Enron, WorldCom, Fannie Mae, Tyco, etc. It was short sellers.

    Remove their incentive for doing the forensic accounting and deep research, and you create a haven for publicly traded accounting fraud and scam artists…

  13. Val commented on Aug 22

    Ken, I strongly disagree. The fact that short selling introduces more volatility helps a great deal in price discovery – in 2 ways:

    1. Because the swings are wider and occurs at a faster pace, I submit that the equilibrium “right” price can, in many instances, be reached faster.

    2. Added volatility makes investors nervous – which should encourage additional and more thorough due diligence on the company, and I believe rewards those with the most accurate knowledge.

    I’m with you only in that I am not a big fan of naked shorting. Otherwise, short sellers do the market a huge favor by keeping people on their toes and encouraging better diligence. Note that short sellers face a lot of risk in what they’re doing – so it’s not like they’re doing what a lot of hedge funds the last few years have been doing – going with mundane methods of investment but goosing their returns via obscene amounts of leverage.

  14. Krup commented on Aug 23

    Anybody who conflates Short Selling with Illegal Naked Short Selling is either seriously negligent, or on the take. Either way, Kass is now on the Do Not Read list for me.
    Do not be confused by this important distinction. It really is apples and oranges.
    This is an important issue that is finally being addressed, research it for 15 minutes:
    Learn more at and

  15. Bob commented on Aug 23

    Speaking on Friday [Aug 22, 2008] on CNBC television, … “You always find out who’s been swimming naked when the tide goes out. We found out that Wall Street has been kind of a nudist beach” said Buffett.

  16. steve commented on Aug 23

    I don’t understand this need to justify short selling. It exists. Two people agree on a contract and that’s that. It doesn’t need to add value. It doesn’t need to add to price discovery (which it does). The market isn’t some pillar of justice and an ethical construct. Get over it. If you don’t like it then don’t play.

  17. Joe commented on Aug 23

    That is insane bashing short sellers. When the market is oversold, I am glad I have something to do besides sit on my hands, waiting for value.

  18. Joe commented on Aug 23

    *When the market is overbought, sorry.

    BTW I trade about 3X as many longs as shorts

  19. Mark E Hoffer commented on Aug 24

    Posted by: Krup | Aug 23, 2008 6:09:38 AM


    thank you for posting those links, they are a good example of what I was referring to.


    you might want to check out slides 40 & 47 of

  20. scott b commented on Aug 24

    naked short selling IS the issue! IT’s illegal and the SEC does nothing to prevent it!

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