Earlier quoted context omitted.
Zero price elasticity of demand is definitely antithetical to a healthy market. What we disagree on is the role that short floats exceeding 100% plays in causing that. The 3 causal factors behind squeezes are social media, public float, and short float. Short float is the least important variable of the three, by a large distance. GME-like moves happen fairly often, and in most cases these are low-float stocks withou…
100% of float isn't necessarily the point where short interest gets dangerous, and an individual share (imagine you tag it and track it) can be sold short and lent out again for short sale in repeated transactions, even if short interest is nowhere close to fully saturating the float. The point where shorts equal the float is simply a salient mile marker. When shorts cover aggressively or get liquidated, natural sell…
"If the market-maker cannot buy or borrow in time"
What about a rule such as "you can't short more than 5 percent of the float", + require them to keep cash as collateral, as a way to sensibly limit the risk without banning the activity outright?
In your example, the MM was providing a valuable and healthy service because they were trading against the rip and slowing down the squeeze.
"hedge fund speculation that provides essentially zero utility"
I believe on net they provide zero value to their customers since there's an oversupply of them and perfect competition has driven margins down to below fees. They rely on a hucksterish confidence game to trick customers into investing.
But security pricing is important to get right since it guides trillions of dollars of capital allocation in the secondary market. A world where Moderna gets that next billion is much healthier than one where GME gets it. So as an industry they're adding lots of value that way.