I think another important (and infamous) aspect of shorting is the negative behaviour it can inspire. Humans are very susceptible to negative news, and those traders/investors who have made high-risk shorts may be tempted to take actions that may fulfil their prophecies.
In the past, this used to be anonymous faxes, tips, and newspaper articles; nowadays, it’s commonly anonymous commentators on social media, investor forums, investment websites, blogs, etc.
These mediums can be used to launch anonymous short attacks on companies (whether targeting a legitimate weakness, or fabricating one), and there’s increasing evidence of its use and efficacy. Clearly, this type of activity is asymmetrical, as these activists can use the anonymity afforded by the Internet to make disclosure-free, unregulated, and (usually) consequence free claims against a party that is heavily regulated.
Often the claims are false or completely unverifiable, but succeed in spooking investors.
[ I suggest a brief detour to this interesting Harvard Law article for more specific data ]
Just to emphasise, nobody should take this post as a claim that all shorting is inherently bad, but I just wanted to focus on this particular aspect.
The answer to this issue is really complex; it’s a classic case of technology moving so fast that everyone has been left standing. However, it’s something for the wise investor to be aware of when reading any (purported) news about companies, especially if it’s anonymous or unverified!
Thanks for the post @Tommy, and bringing up this really important topic!