Why doesn't the SEC just ban short selling?

Hello, Millwood!

At 5:12 in the afternoon Friday, my sitemeter tells me, someone at a computer in Millwood, NY typed into a search engine "why isn't the sec prohibiting short selling".

This person then ended up here but my October 2 entry appears not to have told him what he wanted to hear, because he soon surfed elsewhere.

So let me try to answer that question more directly, in case any one else ever ends up here by asking it.

The SEC can't just "ban short selling" because it has no such authority from Congress. It did try such a ban for certain stocks as a temporary and emergency measure recently, but that soon lapsed as emergency authority must.

Now, our Millwoodian friend might (I'm just guessing) want to respond that the SEC has the authority to make regulations effectuating the prohibition on securities fraud. It has the authority to do so not as a temporary and emergency measure, but in general and once-for-all.

Faille: But why is short selling inherently fraudulent?

Millwoodian: Because it involves selling what the vendor doesn't own!

Faille: That's irrelevant. Vendors sell what they don't yet own all the time. No law or regulation prohibits me from seeking a greengrocer who will promise me a delivery of apples one month from now. Or prohibits you from selling me that promise. What you're selling is the promise of later delivery of the apples, and that promise is yours to sell.

You need not own the apples yet. In fact I probably don't want you to own the apples yet because apples are perishable. I want the apples to be still green as of today, on a tree somewhere. I expect you to find them and delivery them to me one month from now.

Even if you don't, the failure isn't fraud. It is breach of contract, nothing more.

If you make a promise to deliver apples a month from now, and in order to get me to go along with this you assure me as a matter of fact that you own an orchard -- and if you don't own an orchard -- THAT may be apples fraud. Or analogous assurances may be securities fraud. But that has nothing to do with banning short selling per se.