They can also short below price X but it is not valid unless the exchange rate drops.
to clarify by "not valid" I mean these shorts do not appear on the standard order book and can not be matched with buy orders for bitUSD.
So 2 willing consenting parties involved. 1 wants to take the risk of a short below standard market rates. The other wants to buy. All participants are acting from their own information, their own judgements of profitability etc. I don't see the problem.
If shorting below standard USD market rate is a bad idea, then these actors will pay the price.
I don't think the market should be subject to the 'desires' that only these traders are allowed to trade and only at this price. The market should be subject to the resulting inclination of all participants to "put their money where there mouth is" making there own decisions and paying the price for bad, uninformed ones.
If the market peg holds 10% below the standard, there is a reason for that. Unless your *removing* barriers to free participation, it should not be meddled with.
Shorting below market rates is not a free ride, and trading at all on this new market carries great risk. It will take some time for a more clear and distinguished consensus about where bitUSD should be valued to emerge. I personally think as the tree and it branches grow the price will tend to a tighter range around the standard USD market and I will place my bets accordingly. If you feel otherwise, you know what to do.