Without the ability to short sell, the market can't even function effectively.
Convertible/Risk arbitrage people cannot do their job wihout short selling. The risk-free spread is there for the taking, but you can't take it.
Options market makers cannot hedge their PUT writes without short selling.
This is what I envision:
We'll see a massive short covering rally caused by a dry up in volumes by next week.
Option traders will stop trading as they cannot properly hedge their postions, as will all risk arbitrage, debenture, derivative and ETF traders. Traders of all financial products will not trade if they cannot hedge their positions.
Liquidity will dry up and volatility will increase drastically, which is exactly what the SEC wants to avoid.
The USA has decided to follow their Russian and Pakistani comrades in artificially controlling the market.
It's over fellas.
We've killed the banks. Now we'll kill the hedge funds and the options houses.