This sounds like a good idea except for one thing. As long as there are physical shares being held at brokerage firms what's to stop them from being "borrowed" 2 or 3 or 1000 times over? When someone borrows shares for the purpose of shorting they are being sold. They end up in a position to be borrowed by someone else. It's my understanding this can go on forever and that one person or organization can borrow the same shares over and over again.
If people start to take possesion of their certificates all it does is decrease the liquidity of shares to be borrowed. Until every last share certificate is taken home, there can always be shorting.
If an organization gets too deep into shorting, and share price starts to go against them they will be tempted to short even more to get the share price down.
The only thing I know that can fix this situation are for regulating bodies to put some limitations. It's beyond my understanding why the regulating bodies permit so much shorting. Anyone can see the potential disaster this could inflict on any economy.
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