(c) Professional speculators, the only ones who sell short, do mot necessarily confine their efforts to stocks which should sell lower, but attack two or three ac tive securities, thus tending to upset the whole mar ket.
But balanced against the adverse arguments just given there are the following arguments in favor of short selling.
(a) No human being can undertake to say whether short selling tends more to advance or lower prices in the long run. Every short seller must buy. The man who buys, sells later. The man who sells short must buy later. It is only a question of se quence, and there is no moral element involved in that. The ordinary buyer is a free agent; he can change his mind, withdraw at any time, stay out of the market. But the short is compelled to buy or go bankrupt. It is an absolute commonplace of Wall Street that the stocks in the strongest position are those with a large short interest, because every one lmows there is bound to be support which cannot be withdrawn. The short seller never backs out, altho future-delivery contractors in other lines of trade often do.
(b) Shorts buy when support is most needed— when prices are low. They sell when prices are high est, or at least they try to. Thus extremes are cur tailed. When stocks are topheavy the shorts try to sell. In other words, they supply stock when the de mand is most urgent, just as they make the strongest demand for stock when there is an over-supply. Short selling takes the sharpness out of nearly every movement. It distributes losses over a period of time on the downward side. It shifts the risk from inves tors to professional speculators. It provides a step ping-off place all the way down. It spreads the loss over a wider surface. It prevents a sudden slump from a high price to relatively no price at all. These • statements I think are amply proved by the gradual decline in New Haven stock, in which there has been plenty of short selling, as compared with the sicken ing slumps in the shares of Boston and Maine leased lines, in which there was little if any short selling. Dr. Henry C. Emery, a leading authority on specu lation, declares that short selling performed the same function in the '90's in the case of Atchison. On the other hand, where there is an active demand for stocks for any reason, the advances are far more rapid if there are no bold spirits to sell short.
(c) Far more harm is done by putting stocks too high than by driving them too low. More money is lost on the bull than on the bear side. Panics come from over-doing and not from underdoing. There are laws to punish those who circulate rumors to de press bank stocks, but there are no laws to punish the man who circulates a false rumor to put stocks up. Most persons prefer the bull rather than the bear side, and there are plenty of manipulators to take advantage of human nature. Thus there are a hun dred false rumors that a stock is going up, to one that it is going down.
Every time a stock goes down the bears are blamed, like the ogres in the fairy tales. This is silly, and every sensible man knows it. The shorts, or bears, are needed, just as a minority party is needed. There could be no active, organized market without short selling, so violent would be the movements without the check that it affords.
(d) Much of the objection to short selling comes from the fallacy that high prices are always beneficial. It may be just as advantageous to buy cheap as to sell dear; therefore, it may be just as desirable for the community to have a force that depresses prices as it is to have one that raises them, altho the real function of short selling is to eliminate extremes— at one period it depresses prices, and later it advances them.
( e) Any sweeping prohibition of short selling would cripple the investment share markets; a large part of the technical short selling at present is not for the purpose of taking advantage of lower prices at all. A man in Chicago telegraphs his brokers in New York to sell one hundred shares of stock, which he has with him. He sends the stock by express, but until the certificates arrive the brokers are short. When receivership for the St. Louis and San Fran cisco Railroad was first rumored, a flood of selling orders were received in New York from London, Ant werp, Berlin and Paris. To execute the orders, brokers here had to borrow stock to deliver, and re main short for a week, until the steamers arrived.
(f) Short selling is a necessary adjunct of the odd lot business, the least speculative on the Exchange. Odd-lot brokers buy and sell on the Stock Exchange in 100-share lots, the regular unit of trading, and then break up these lots into one, ten, seventeen, or any other number of shares, for investors who desire to buy. Small investors do most of their buying when the market is falling, and if the odd-lot broker first buys and then sells to the investor, with the mar ket falling all the time, he loses all the time. But by selling first and buying afterwards (short sell ing), he avoids loss.
The practice of short selling often affords a means of hedging. As the miller must sell futures when he buys spots (or speculates), so persons who have oc casion to use the stock market are often obliged to sell short. This may be true of dealers or bankers who introduce a new issue of securities. What the uninformed consider speculation is often a safeguard, or hedge, against risks which have to be taken. Nat urally this is not an amusement for amateurs to en gage in. Short selling is serious business and is for professionals. Stocks may be cornered or almost cornered, and the short may be squeezed. But he is no more foolish than the man who buys something that he cannot pay for.