From The Stock Market Barometer by William P. Hamilton, published in 1922

The Effect of Short Selling and Traders

Continued from...Stock Brokers and Specialists

Professional Trader's Limited Influence

What is the influence of the active bear trader on the averages? It is negligible so far as the major movement is concerned, a small factor in the secondary swings and mainly influential, at times, in particular stocks in the least considerable movement, the daily fluctuation. Such operations do not affect our barometer in any degree worth serious consideration. Remember the character of the twenty railroad stocks and the twenty industrials used in the two averages. Every one of them complies with the stringent listing requirements of the New York Stock Exchange. Each company concerned publishes the fullest possible figures of its operation, at frequent intervals. There are no "inside secrets," of market value, which could by any possibility affect more, than a single stock out of forty. It may be that one of them unexpectedly passes or increases its dividend. The effect upon that particular stock, if there is any real surprise in the matter (which is highly doubtful), is negligible when spread over the other nineteen stocks of the same group. I do not recall any useful illustrative instance; but suppose unexpected dividend action produced a fluctuation of ten points. It would only make a daily difference in, the average of half a point, which would be almost intsantly recovered if the dividend action presaged no broad general change in business conditions. If there had been any such change we may be entirely sure that it would have already been reflected in the stock market, which would know far more about it than that, or any board of directors.

Short Selling Necessary and Useful

A discussion on the morality of short selling would be utterly out of place here. It is true that the bear cannot profit except where another loses, while the bull at the worst reaps a profit which another man might perhaps have made if he had been attending strictly to his business. But every free market for anything is helped far more than hurt by traders willing to sell short. If, indeed, there were not this liberty the result would be a most dangerous market, liable to an unsupported panic break at any stage of its progress. Voltaire said that if there had not been a God it would have been necessary to invent one. It must have been long ago, in the days when what afterward became the London Stock Exchange did its business in Jordan's Coffee House off Cornhill, that bear selling was invented.

It soon, became a patent necessity; and it is curious that some of the most serious breaks in the London market have occurred, not in the wildly speculative securities, but in bank stocks, where the English law prohibits short selling. It was unsupported pressure in some bank stocks which helped to make the Baring crisis of 1890 so serious. There is no such valuable support for a falling market as the uncovered bear account. When it is absent, as in this particular instance, nothing but a bankers' combination hastily improvised can check the devastating decline. As the London Stock exchange was reorgainized in 1922 on its old basis, without further government meddling and regulation, Parliament will repeal this law and substitute (as a protection to bank stocks), that complete and constant publicity which is always the public's best safeguard.

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From The Stock Market Barometer by William P. Hamilton, published in 1922