I've never got the impression that most economists think short selling distorts the market's price discovery mechanisms, and it's really dishearting that the GP is being downvoted for, plainly and clearly, stating what is economic orthodoxy.
Anyway, the futures market has functioned for centuries with people buying and selling what they don't own, and the big institutional buyers and sellers commonly use futures prices as their benchmark prices. It looks like the smart money isn't too concerned about negative effects on price discovery.
Also, let's not confuse playing by the clearly established rules of the market with "fraud". Moral objection is no excuse for equivocation.
However, with naked short selling it's a different story. When you're short selling something that you don't own you're in effect making it look like the supply is bigger than it actually is. This distorts the price discovery mechanism.
Naked short interest is almost certainly too ephermal to distort the price, but suppose it does due to illusory oversupply.
So what's the objection? If you buy, hold, and sell, you want prices to be overall lower. Selling low isn't bad if it means you were also buying low. In short, as Warren Buffet likes to point out, low prices are good for investors.
For Pete's sake, it's the rules of the game. You might have an objection to naked shorting. but you can't redefine naked shorting as "pretending" because you don't like the rules.
They're not pretending to follow the rules of the market, they are actually following the rules of the market. Having actual posession of the item at the precise moment of sale is not a rule of the market in question. Lay investors still get their shares delivered, so I have no idea what you're worrying about.
No. If someone bought all the traded shares of overstock.com at a particular point in time, they would've bought 107% of the available shares. So it would be impossible for all their shares to get delivered.
Generally, if short interest gets very high many, many professional investors get interested in buying the stock for precisely that reason. Buy enough and recall your stock, ie make it not available for borrow and you create a short squeeze sending the price into the stratosphere and then you can sell into the squeeze making a tidy profit. If you are short and your stock gets recalled you could theoretically lose your entire net worth. Something similar actually happened in Germany with Porsche trading VW stock and VW shorts getting killed during the financial crisis.
The fact that no one was willing to do that to OSTK stock tells you how shitty the company is and how overvalued the stock was.
Anyway, the futures market has functioned for centuries with people buying and selling what they don't own, and the big institutional buyers and sellers commonly use futures prices as their benchmark prices. It looks like the smart money isn't too concerned about negative effects on price discovery.
Also, let's not confuse playing by the clearly established rules of the market with "fraud". Moral objection is no excuse for equivocation.