I still don’t understand why shorting is legal as it provides no value and enables hedge funds to extract value using illogical tricks.
Contra:
> Advocates of short selling argue that the practice is an essential part of the price discovery mechanism.[52] Financial researchers at Duke University said in a study that short interest is an indicator of poor future stock performance (the self-fulfilling aspect) and that short sellers exploit market mistakes about firms' fundamentals.[53]
> Such noted investors as Seth Klarman and Warren Buffett have said that short sellers help the market. Klarman argued that short sellers are a useful counterweight to the widespread bullishness on Wall Street,[54] while Buffett believes that short sellers are useful in uncovering fraudulent accounting and other problems at companies.[55]
> Shortseller James Chanos received widespread publicity when he was an early critic of the accounting practices of Enron.[56] Chanos responds to critics of short-selling by pointing to the critical role they played in identifying problems at Enron, Boston Market and other "financial disasters" over the years.[57] In 2011, research oriented short sellers were widely acknowledged for exposing the China stock frauds.[58]
[…]
> Several studies of the effectiveness of short selling bans indicate that short selling bans do not contribute to more moderate market dynamics.[61][62][63][64]
* https://en.wikipedia.org/wiki/Short_(finance)#Views_of_short...
Per §History in above, short selling has been around since 1607 and the very first stock market (Dutch) and the Dutch East India Company.
In the US, the SEC examined it in 1934, 1937, 1963, and 1976:
* https://www.investopedia.com/articles/investing/110614/why-s...
This 2021 article examines the topic of banning short selling:
* https://www.morningstar.com/funds/should-shorting-stocks-be-...
On the other hand, shorts (at least as implemented) are prone to cascading in both positive and negative directions, and are also an "obvious" reminder of how the "stock-market" economy is utterly divorced from the "production" economy.
"Price discovery" is a lie when it is also "price creation".
Hence temporary bans are common when the market is volatile.
I'm not saying the justification doesn't exist, but I don't think the reasons you articulated are sufficient.
Hoover
https://www.npr.org/2021/02/15/966877259/wall-street-short-s...
https://arxiv.org/abs/2107.11255
One thing I know is that most people who sell short lose since the market does tend to go up over time.