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A Biotech Short-Seller Responds to Critics

"Short sellers have thick skins and are certainly accustomed to a certain level of dislike from the rest of the market. No one expects CNBC to air a daily segment, 'Short-Selling Heroes of Wall Street.' But the trend towards criminalizing short sellers, whether it's in the court of public opinion or through actual regulation, can cause the very market volatility regulators hope to avoid. Attempts to discredit an opinion by attacking the legitimacy of the source are only persuasive on a superficial level.

"Opponents of short selling accuse short sellers of operating in the dark and without proper disclosure. I can tell you from experience that ad hominen attacks only have a stultifying effect on the willingness of short sellers to be more visible. Who wants to make their bearish view public if it means having to defend oneself against litigation, no matter how frivolous, or a government investigation, no matter how politically motivated? All that extra work costs time and money as well as the opportunity cost. In effect, some long investors are depriving themselves of the opportunity to hear an opposing view. In many cases this means that they will be selling their shares to a covering short seller at a price far below where they might have otherwise sold them were they privy to the short thesis. It is difficult to assess the effect of these attacks because one cannot know how many short sellers would be inclined to make their case publicly were the risk of litigation or government investigation nonexistent.

"Short sellers serve a vital function in our capital markets. They effect efficient price discovery despite our regulators' best efforts to impede price discovery when stocks move down. Does anyone seriously think we will see a downtick rule when stocks are up greater than 10%? Or a loosening of the rules governing stock borrow? For long-only investors who would like to see the voice of short sellers squelched, I say listen to Ayn Rand: "You can avoid reality but you cannot avoid the consequences of avoiding reality."

What if any changes to the practice of short selling would you make? Are short-selling rules too liberal or too restrictive? Please share your thoughts and ideas in the comments section below.

Adam Feuerstein writes regularly for TheStreet. In keeping with company editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet. He also doesn't invest in hedge funds or other private investment partnerships. Feuerstein appreciates your feedback; click here to send him an email.
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