Shortselling helps fluidity, when the market is crashing.

When a market is on the rise, the only people who short sell are hedging their bets in quite a responsible way.
When a market falls, people who have not sold their shares in a company are outweighed by dealers short selling, crashing the market, and have no real interest in the company. In fact, they are observers 'just saying' that they have no confidence in that company, but rather than leave it alone, drive it down. This panics the true investors into selling at whatever price they can get.
When a market is on the rise, short selling does not help liquidity.
When a market is on the fall, short selling helps liquidity.

Question: When a market is on the fall do we want that liquidity or more 'stickiness' to give people a chance to reflect? What is the purpose of a system that does not help a rising market, but adds chaos to a market that is falling?

Originally posted by redled

When a market falls, people who have not sold their shares in a company are outweighed by dealers short selling, crashing the market, and have no real interest in the company. In fact, they are observers 'just saying' that they have no confidence in that company, but rather than leave it alone, drive it down.

Did you mean ...
In a Falling Market people that do nothing are Observers and are willing to lose their investment.
In a Falling Market Short Selling is used to reduce the implied overinflation of a Stock by reducing that stocks amount through removing capitalization thereby rendering it Liquid.

Originally posted by redled
This panics the true investors into selling at whatever price they can get.

When a market is on the rise, short selling does not help liquidity.
When a market is on the fall, short selling helps liquidity.

True investors would be watching for short selling and even doing it themselves, in fact Short Selling on a rising market can help liquidity by removing excess capitalization that could result in faster falls, which would appear as a Bear Raid. Please see the Uptick rule.

Originally posted by redled
Question: When a market is on the fall do we want that liquidity or more 'stickiness' to give people a chance to reflect? What is the purpose of a system that does not help a rising market, but adds chaos to a market that is falling?

You need to understand that the market indices are a conglomeration of the averages of a number of Companies, the DOW for instance is actually made up of the thirty top performing companies.

reply to post by 2stepsfromtop


Now, instead of selling short, investors will just... sell.

Originally posted by Rockpuck
reply to post by 2stepsfromtop

 

Now, instead of selling short, investors will just... sell.

That's the point, investors will actually sell when they want to, not by some market setters decrying the price. Liquidity is important, but excessive volatility can prove moreso.