Fortunately there is money to be made (arbitrage) in creating tranparency.

Unless you ban one end of that arb (shortselling).

I agree.

But not all is lost. There are ways around that. Ever heard of Put-Call-Parity and similiar relations that allow for the creation of synthetic products? (See http://en.wikipedia.org/wiki/Put-call_parity and http://en.wikipedia.org/wiki/Synthetic_options_position)

I trade options, and I know that people cuold put on synthetics in lieu of shorting outright. But the market makers on the other side of the trade have to short the stock in order for them to properly hedge. Since it's much harder to do, the spreads on options became pretty retarded after the short-selling ban. This reduced liquidity, put the VIX, VXO, VXN, to all time highs, and exacerbated the moves downward.

The past 30 days have essentially become one very long one.