I do not believe that the short sellers are the major risk to the brokerage. Short sellers of equities make profits when the market goes down, thus they rarely do poorly when markets crash. Overleverege on the long side is much more of a problem, especially if the firm uses proprietary trading on the long side. Overreliance on derivatives to hedge these risks may cause a cascade of counterparty failures leading to market failure. Luckily for the too big to fail the Fed and the US treasury will underwrite the leverage with our tax dollars to prevent the embarrassment this disaster may cause.
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