Short selling has always been a highly scrutinized practice, but never has the scrutiny been as intense as it has become in the last 24 hours. As the financial system seems to be grinding to a halt and bank after bank is forced to either go bankrupt or be bailed out by the government the short selling in these financial names has come under a huge amount of debate. Some on the street are saying that the short sellers are largely to blame for some of these companies issues, while others believe the short sellers are simply profiting in a perfectly legal way from the crisis that these financial institutions got themselves into.

What is short selling? Short selling is the practice of selling a security that one doesn't already own in hopes of repurchasing the security at a lower price and making a profit from the security falling in its value. Short selling was blamed by many for the Wall Street crash in 1929, and following that crash rules were put into place that made it much more difficult to sell stocks short. The most notable of the regulations that was put into place was the uptick rule. The uptick rule was adopted in 1938 and was enforced until July 2007 when the SEC decided to abolish the rule. The uptick rule basically was just as it sounds, a rule that forced short sellers to wait to short a stock until it had ticked higher on its most recent trade.

The SEC just yesterday announced new plans to curb short selling, but stopped short of reimplementing the uptick rule. The calls for the uptick rule to be reinstated are getting stronger and stronger by the minute it seems, as the very reason for that rule being needed has never been more evident than it is today. Expect to hear more from SEC Chair Christopher Cox in the coming days.

Is short selling to blame for the current market crisis? Absolutely not. Those who want to solely blame short sellers for the mess that our financial system has gotten itself into right now are simply blinded from the truth. The truth is many of these financial companies have failed because they made very poor business decisions and leveraged their balance sheet to levels that were absolutely ridiculous. You can't blame short sellers for hoping to profit from these firms and their pathetic decision making.

At the end of the day the uptick rule which was abolished last year during a bull market will likely need to be implemented once again. At some point short selling becomes a thing that can drive down companies who have a proven balance sheet and put them in a place where they should never be if it weren't for short sellers.

Short selling needs to be regulated and regulated closely, but to blame short sellers for the mess our financial system is in right now isn't the least bit logical.