Short selling is an essential component of healthy and functioning financial markets
Short selling is a regulated and widely used strategy. Investors use short selling when they believe, based on fundamental research, that a stock price is overvalued. Short selling promotes liquidity, stabilizes the market, and helps investors and companies reduce risk in their portfolios.
Some short sellers also conduct in-depth research and analysis that exposes financial fraud and corruption, such as the case in the Enron, Valeant, and Wirecard corporate corruption scandals. Additionally, short sellers correctly indicated the U.S. housing market was overvalued before the 2007-2008 financial crisis.
Regulators have long recognized the vital role of short selling to help markets function efficiently. The practice of short selling is well regulated and has oversight and transparency that allows the strategy to benefit a wide array of investors.
Securities laws give the SEC the authority to gain access to trading information and to prevent market manipulation. Permitting short selling, particularly with the current robust regulatory framework, means that investors can manage risks better and markets can factor in the broadest possible views about a particular stock, bond, or index – reducing the likelihood of bubbles forming.