The truth about shorting is revealed: the market is not that bad.

CascadingDipBuyer · 2025-12-01T16:16:54+00:00

Many people think that shorting hurts stock prices, but the data speaks for itself: the actual situation is completely different.The true role of shortingIt seems that shorting is terrible, but 40%-50% of the trading volume in the US stock market is shorting every day. This is not because there are big bad actors crashing the market, but because market makers and arbitrageurs are maintaining market liquidity. Their short positions are usually closed within a few minutes to a few days – it's not about holding positions to suppress stock prices.Hedge funds are the long-term shorters, but they hold about $1.5 trillion in net assets and typically have hedged positions (both long and short), with only less than 1.3% of hedge funds specializing in shorting.What does the data say?- The shorting ratio of most stocks is quite small: the median is only 5% or less of the circulating shares.- Delivery failures are very rare: on any given day, 75% of stocks have no delivery failure records at all, and 96% of companies' delivery failures are below 10,000 shares.- Loss

CascadingDipBuyer

2025-12-01 16:16:54

Many people think that shorting harms stock prices, but the data speaks for itself: the reality is completely different.

The Real Role of Shorting

It seems that shorting is terrible, but 40%-50% of the daily trading volume in the US stock market is shorting. This is not because there are big bad guys manipulating the market, but because market makers and arbitrageurs are maintaining market liquidity. Their short positions are usually closed within a few minutes to a few days — it's not about holding positions that suppress stock prices.

Hedge funds are the long-term shorters, but they hold approximately $1.5 trillion in net assets and typically take hedged positions (both long and short), with less than 1.3% of hedge funds specializing in shorting.

What the data says

Most stocks have a small shorting ratio: the median is only 5% or less of the outstanding shares.
Delivery failures are rare: On any given day, 75% of stocks have no delivery failure records at all, and 96% of companies have delivery failures of less than 10,000 shares.
The amount of failed transactions is negligible: The total of all failed transactions is less than 0.01% of the market value, with only $200 million to $500 million daily, while the entire U.S. stock market has a daily trading volume of nearly $700 billion.
Shorting position stability: The short positions have remained stable for several years, even decreasing during bear markets.

How do the rules constrain

The SEC has Reg SHO rules that restrict shorting - after a stock drops 10% in a day, short orders cannot break the bid price (uptick rule) and must wait for buyers to actively place bids. This serves as a “circuit breaker” to prevent a sell-off.

How Academics View It

Research generally agrees: shorting actually makes the market more efficient. It tightens spreads, increases liquidity, and makes valuations more accurate—resulting in lower financing costs for companies. A short-term ban on shorting will instead widen spreads, harm liquidity, and stock prices will still fall.

Bottom line: Data shows that shorting is primarily maintained by professionals in the market and is not the main culprit for suppressing stock prices. Most shorting is intraday closing, with small positions and regulatory constraints. Compared to shorting, retail investors directly selling has a greater impact on stock prices.

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