Sceptical shorts can save your shirts

Seven brokerage bodies yesterday lobbied the government to follow the example of some European and Asian markets and ban short selling, citing the benchmark Hang Seng Index's more than 25 per cent loss over the past two months.

South China Morning Post, October 5

I have a better idea. Let's ban the index instead. After all, you can never be sure that short-selling alone forced the market down 25 per cent. Next time we may find something else pushing it down whereas, if we ban the index itself, it will never fall 25 per cent again. Makes sense, doesn't it?

Okay, back to the real world. I can think of a good reason that we should continue to allow short-selling and, in fact, encourage the practice. It is that the professional shorts provide some of the most thorough investment research I have ever read and help protect ordinary investors from thievery in ways that regulators never can.

The most obvious case of it recently was the trashing of Sino-Forest by a small research house, Muddy Waters, whose backers took short positions in the stock before publishing their findings and cleaned up when the price crashed. I'm still waiting for a Sino-Forest libel suit against Muddy Waters. Perhaps I shall have to wait a long time.

But a friend sent me a copy of an even more venomous report on a mainland company the other day.