You seem to think shorting is illegal - I don't think you understand the function of a MM.
MMs do not "short" penny stocks. As part of making a market, they may have periodic short positions throughout a trading day if they fill buy orders for more shares than they have in inventory, but they also often have inventory when they fill sell orders. Having an inventory does not mean that they are going "long" any more than having a temporary net short position is "shorting." This kind of temporary short position is legal and necessary for efficient trading.
The FINRA daily Reg Sho data does not show true short positions and that the Bi-Weekly report is the only reliable one. It also explains that when new shares are entering the market, they are reported as short until the stock is delivered.
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