The Truth About Short Selling: It's Actually Good for Markets

Short selling has a bad rap, but here’s what the data actually shows: it’s mostly done by market makers and traders keeping markets efficient, not villains tanking stocks.

Who’s actually shorting?

Turn out the big players doing shorts aren’t hedge funds betting against companies—they’re intermediaries. Market makers short when they buy first to fill your order. Arbitrageurs short related stocks to help large buys go through. ETF traders short to keep prices fair. These guys close positions in hours or days, not holding massive shorts.

Hedge funds? They short too, but they’re usually net-long overall. Only 1.3% of hedge funds are dedicated short sellers. So the narrative of massive coordinated shorting? Not really happening at scale.

The data doesn’t lie:

• Typical stock has ~40-50% of daily volume as short trades (matches intermediary activity)
• Median short position across sectors: 5% or less of shares
• Failed trades: consistently below 0.01% of market cap (~$2-5B when US daily volume is $700B)
• Three-quarters of stocks have zero fails on any given day
• Even in market crashes, shorts go down, not up

Why shorts actually help you:

Academic research is clear: short selling tightens bid-ask spreads, boosts liquidity, and improves price accuracy. Translation: you pay less to trade, and companies can raise capital cheaper. When shorts are restricted? Spreads widen, liquidity dries up, stocks still fall anyway.

The circuit breaker exists anyway:

When a stock drops 10% intraday, the uptick rule kicks in. Shorts can’t hit the bid—they have to wait for buyers to come to them. This slows panic selling without banning it.

Bottom line: Short selling is a feature, not a bug. The data shows most shorting is legitimate market-making, not manipulation. And when long investors want out of highly shorted stocks, they recall their lent shares, forcing shorts to cover and adding buying pressure.