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Short-Selling Vital to the Market: Hedge Fund Experts

Short selling is a vital part of maintaining balance in the market, and people should stop viewing it as "evil" or "un-American", said Paul Roth, a partner at Schulte, Roth & Zabel.

The practice gets an unfair reputation as a market-manipulator, when spreading false information is really the culprit, Roth said, during an interview on CNBC.

Michael Steinhardt, chairman of Wisdomtree Investments, said shorting is often the most telling option for the economy.

"If one looks back and finds those stocks that have been picked upon by shorts, that have been the subject of all this sort of talk, and find out what ultimately occurs to the price of those shares," he said, "overwhelmingly, one will find that the shorts were right."

Prior to the SEC's new emergency ruling against "naked" short-selling, it was legal to short a financial unless one intentionally misled their broker into believing they had located shares that they were unable to deliver, Roth said.

The problem is that the rule is only designed to build investor confidence in the financial sector, and not to completely eliminate the practice, Roth said. That's why the SEC chose to enforce the regulation onlyamong the 19 financial institutions that serve as primary dealers.

"I think when this period is looked back on historically, it will not be viewed as a great period for regulation," Steinhardt said.

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