John Dizard is a must-read:

A volatility trader’s strategy is not based on increases or decreases in the prices of underlying stock, but on the rate of change of those prices. The central criticism of “vol” trading is that volatility is an attribute, not an asset class, and is not a stable attribute at that. In the past months, though, volatility has been so high and pervasive that it seems to have almost acquired a life, and a press agent, of its own.

Not all the vol traders made it past the losses and redemptions. I had a long discussion with Adam Stern, a general partner in AM Investment Partners, whose profitable nine-figure New York fund has now closed to new investors. As he says: “A pure long vol strategy that takes all the human intellect out of it is not sustainable. If you look at the pure quantitative long and short volatility strategies, the long vol people didn’t last long enough to see this market, and the short vol people had their head handed to them [by the increase in volatility].” One of the slight technical problems with volatility trading is that you should be simultaneously long and short the market, interested only in the absolute value of the rate of change. This doesn’t work quite as well when, for example, regulators say you can’t short large categories of stocks.

The performance of the financial stocks (down sharply) over the period of the short selling ban would suggest that maybe there were reasons for their decline other than cynical piling on by short sellers.

Something that may have been overlooked by regulators, politicians, CEOs, the Archbishop of Canterbury, and other enemies of short selling was the effect of the disappearance of AIG, dramatically, and others, less dramatically, from the credit default swap market.

Read the whole thing, which includes a highly technical, but very interesting and essential explanation as to how short selling could have allowed for investors to put a halt to the rapid stock declines that we saw last week. Pity we didn’t have that tool at hand. And pity that the reason we didn’t have that tool at hand had to do with the desire on the part of policymakers to scapegoat short-sellers and speculators instead of taking the time to understand why speculating and short-selling was and is important for the purpose of maintaining efficient markets.