Short sellers cover their positions by *buying*.
Let's say that a stock falls in price. Those who shorted at higher prices provide buying pressure (i.e., liquidity) for those who are looking to sell right now.
By removing short sellers from the picture, you are removing buying pressure when stocks fall once again. In fact, I believe this creates a situation where price drops can be much sharper since there is no short covering to act as a buffer.
Someone else must now take the risk of providing the liquidity and acting as a buyer.
Perhaps this is one of the reasons that the ban is temporary.
For a further defense of short-selling, click here.
Sep 22 2008, 03:15 PM