SEC ends uptick rule but vows crackdown on naked short selling

The SEC has voted to end price restrictions on short-selling. Under the uptick rule which was instituted in 1938, shares could only be sold short on an uptick -- That is the price of the stock on the short-sale must be higher than the last trade. The SEC also said it would strengthen its "fight" against naked short selling.

This is a victory for investors: The much-maligned short sellers are the financial markets' first line of defense against fraud and ludicrous valuations. Rules making short-selling easier increase the incentives for market participants to police the markets themselves, and can prevent fraudulent or overvalued companies from running even higher.

The crackdown on naked short selling however, appears to be a concession designed to appease a very vocal group of conspiracy theorists. As long as shorts are eventually covered, there appears to be little harm in naked short selling. The requirement to borrow shares is cumbersome and unnecessary. I've discussed this issue with numerous anti-short selling people, and none have been able to provide an answer to this challenge:

Please provide the name of a legitimate, profitable business that has been harmed by naked short selling.

In spite of all the complaining and conspiracy theories, I've never seen a company take the action to deal with a poor valuation supposedly caused by short-selling: If Overstock (NASDAQ: OSTK) is so undervalued, why doesn't Patrick Byrne take it private? Why aren't suitors lining up to acquire it?

There are a number of mechanisms in the market to prevent stocks from receiving gross undervaluations: Private equity funds, strategic buyers, share buybacks, etc. By making life harder for short sellers, the SEC is weakening one of the only mechanisms in place to proactively stop fraud.