In the stock market, a short squeeze is a rapid increase in the price of a stock owing primarily to an excess of short selling of a stock rather than underlying fundamentals. A short squeeze occurs when demand has increased relative to supply because short sellers have to buy stock to cover their short positions. [1]
Short selling is a finance practice in which an investor, known as the short-seller, borrows shares and immediately sells them, hoping to buy them back later ("covering") at a lower price. As the shares were borrowed, the short-seller must eventually return them to the lender (plus interest and dividend, if any), and therefore makes a profit if they spend less buying back the shares than they received when selling them. However, an unexpected piece of favorable news can cause a jump in the stock's share price, resulting in a loss rather than a profit. Short-sellers might then be triggered to buy the shares they had borrowed at a higher price, in an effort to keep their losses from mounting should the share price rise further.
Short squeezes result when short sellers of a stock move to cover their positions, purchasing large volumes of stock relative to the market volume. Purchasing the stock to cover their short positions raises the price of the shorted stock, thus triggering more short sellers to cover their positions by buying the stock; i.e., there is increasing demand. This dynamic can result in a cascade of stock purchases and an even bigger jump of the share price. [2] [3] Borrow, buy and sell timing can lead to more than 100% of a company's shares sold short. [4] [5] This does not necessarily imply naked short selling, since shorted shares are put back onto the market, potentially allowing the same share to be borrowed multiple times. [6]
Short squeezes tend to happen in stocks that have expensive borrow rates. Expensive borrow rates can increase the pressure on short sellers to cover their positions, further adding to the reflexive nature of this phenomenon.
Buying by short sellers can occur if the price has risen to a point where shorts receive margin calls that they cannot (or choose not to) meet, triggering them to purchase stock to return to the owners from whom (via a broker) they had borrowed the stock in establishing their position. This buying may proceed automatically, for example if the short sellers had previously placed stop-loss orders with their brokers to prepare for this possibility. Alternatively, short sellers simply deciding to cut their losses and get out (rather than lacking collateral funds to meet their margin) can cause a squeeze. Short squeezes can also occur when the demand from short sellers outweighs the supply of shares to borrow, which results in the failure of borrow requests from prime brokers. This sometimes happens with companies that are on the verge of filing for bankruptcy.
Short squeezes are more likely to occur in stocks with relatively few traded shares and commensurately small market capitalization and float. Squeezes can, however, involve large stocks and billions of dollars. Short squeezes may also be more likely to occur when a large percentage of a stock's float is short, and when large portions of the stock are held by people not tempted to sell. [7]
Short squeezes can also be facilitated by the availability of inexpensive call options on the underlying security because they add considerable leverage. Typically, out of the money options with a short time to expiration are used to maximize the leverage and the impact of the squeezer's actions on short sellers. Call options on securities that have low implied volatility are also less expensive and more impactful. (A successful short squeeze will dramatically increase implied volatility). [8]
The opposite of a short squeeze is the less common long squeeze. A squeeze can also occur with futures contracts, especially in agricultural commodities, for which supply is inherently limited. [9]
In May 1901, James J. Hill and J. P. Morgan battled with E. H. Harriman over control of the Northern Pacific Railway. By the end of business on May 7, 1901, the two parties controlled over 94% of outstanding Northern Pacific shares. The resulting runup in share price was accompanied by frenetic short selling of Northern Pacific by third parties. On May 8, it became apparent that uncommitted NP shares were insufficient to cover the outstanding short positions, and that neither Hill and Morgan nor Harriman were willing to sell. This triggered a sell-off in the rest of the market as NP "shorts" liquidated holdings in an effort to raise cash to buy NP shares to meet their obligations. The ensuing stock market crash, known as the Panic of 1901, was partially ameliorated by a truce between Hill/Morgan and Harriman. [10]
In October 2008, a short squeeze triggered by an attempted takeover by Porsche temporarily drove the shares of Volkswagen AG on the Xetra DAX from €210.85 to over €1000 in less than two days, briefly making it the most valuable company in the world. [11] [12] Then-Porsche CEO Wendelin Wiedeking was charged with market manipulation but was acquitted by a Stuttgart court. [13] [14]
In 2012, the U.S. Securities and Exchange Commission charged Philip Falcone with market manipulation in relation to a short squeeze on a series of high-yield bonds issued by MAAX Holdings. After hearing that a firm was shorting the bonds, Falcone purchased the entire issue of bonds. He also lent the bonds to the short-sellers, and then bought them back when the traders sold them. As a result, his total exposure exceeded the entire issue of the MAAX bonds. Falcone then stopped lending the bonds, so that short-sellers could not liquidate their positions anymore. The price of the bonds rose dramatically. [15] [16] The short-sellers could only liquidate their positions by contacting Falcone directly. [16]
In November 2015, Martin Shkreli orchestrated a short squeeze on failed biotech KaloBios (KBIO) that caused its share price to rise by 10,000% in just five trading days. KBIO had been perceived by short sellers as a "no-brainer near-term zero". [17]
The GameStop short squeeze, starting in January 2021, was a short squeeze occurring on shares of GameStop, [18] [19] primarily triggered by the Reddit forum WallStreetBets. [20] [21] This squeeze led to the share price reaching an all-time intraday high of US$483 on January 28, 2021 on the NYSE. [22] [23] This squeeze caught the attention of many news networks and social media platforms. [24]
In economics and finance, arbitrage is the practice of taking advantage of a difference in prices in two or more markets – striking a combination of matching deals to capitalise on the difference, the profit being the difference between the market prices at which the unit is traded. When used by academics, an arbitrage is a transaction that involves no negative cash flow at any probabilistic or temporal state and a positive cash flow in at least one state; in simple terms, it is the possibility of a risk-free profit after transaction costs. For example, an arbitrage opportunity is present when there is the possibility to instantaneously buy something for a low price and sell it for a higher price.
A stock market, equity market, or share market is the aggregation of buyers and sellers of stocks, which represent ownership claims on businesses; these may include securities listed on a public stock exchange as well as stock that is only traded privately, such as shares of private companies that are sold to investors through equity crowdfunding platforms. Investments are usually made with an investment strategy in mind.
In finance, being short in an asset means investing in such a way that the investor will profit if the market value of the asset falls. This is the opposite of the more common long position, where the investor will profit if the market value of the asset rises. An investor that sells an asset short is, as to that asset, a short seller.
In finance, a put or put option is a derivative instrument in financial markets that gives the holder the right to sell an asset, at a specified price, by a specified date to the writer of the put. The purchase of a put option is interpreted as a negative sentiment about the future value of the underlying stock. The term "put" comes from the fact that the owner has the right to "put up for sale" the stock or index.
Day trading is a form of speculation in securities in which a trader buys and sells a financial instrument within the same trading day, so that all positions are closed before the market closes for the trading day to avoid unmanageable risks and negative price gaps between one day's close and the next day's price at the open. Traders who trade in this capacity are generally classified as speculators. Day trading contrasts with the long-term trades underlying buy-and-hold and value investing strategies. Day trading may require fast trade execution, sometimes as fast as milli-seconds in scalping, therefore direct-access day trading software is often needed.
An exchange-traded fund (ETF) is a type of investment fund that is also an exchange-traded product, i.e., it is traded on stock exchanges. ETFs own financial assets such as stocks, bonds, currencies, debts, futures contracts, and/or commodities such as gold bars. The list of assets that each ETF owns, as well as their weightings, is posted on the website of the issuer daily, or quarterly in the case of active non-transparent ETFs. Many ETFs provide some level of diversification compared to owning an individual stock.
The short interest ratio represents the number of days it takes short sellers on average to cover their positions, that is repurchase all of the borrowed shares. It is calculated by dividing the number of shares sold short by the average daily trading volume, generally over the last 30 trading days. The ratio is used by fundamental and technical traders to identify trends.
In finance, margin is the collateral that a holder of a financial instrument has to deposit with a counterparty to cover some or all of the credit risk the holder poses for the counterparty. This risk can arise if the holder has done any of the following:
An order is an instruction to buy or sell on a trading venue such as a stock market, bond market, commodity market, financial derivative market or cryptocurrency exchange. These instructions can be simple or complicated, and can be sent to either a broker or directly to a trading venue via direct market access. There are some standard instructions for such orders.
Naked short selling, or naked shorting, is the practice of short-selling a tradable asset of any kind without first borrowing the asset from someone else or ensuring that it can be borrowed. When the seller does not obtain the asset and deliver it to the buyer within the required time frame, the result is known as a "failure to deliver" (FTD). The transaction generally remains open until the asset is acquired and delivered by the seller, or the seller's broker settles the trade on their behalf.
A naked option or uncovered option is an options strategy where the options contract writer does not hold the underlying security position to cover the contract in case of assignment. Nor does the seller hold any option of the same class on the same underlying security that could protect against potential losses. A naked option involving a "call" is called a "naked call" or "uncovered call", while one involving a "put" is a "naked put" or "uncovered put".
In economics and finance, market manipulation is a type of market abuse where there is a deliberate attempt to interfere with the free and fair operation of the market; the most blatant of cases involve creating false or misleading appearances with respect to the price of, or market for, a product, security or commodity.
The United Copper Company was a short-lived United States copper mining business in the early 20th century that played a pivotal role in the Panic of 1907.
Stocks consist of all the shares by which ownership of a corporation or company is divided. A single share of the stock means fractional ownership of the corporation in proportion to the total number of shares. This typically entitles the shareholder (stockholder) to that fraction of the company's earnings, proceeds from liquidation of assets, or voting power, often dividing these up in proportion to the amount of money each stockholder has invested. Not all stock is necessarily equal, as certain classes of stock may be issued, for example, without voting rights, with enhanced voting rights, or with a certain priority to receive profits or liquidation proceeds before or after other classes of shareholders.
Philip A. Falcone is an American businessman and the founder of Harbinger Capital and LightSquared.
Andrew Edward Left is an activist, short seller, author and editor of the online investment newsletter Citron Research, formerly StockLemon.com. Under the name Citron Research, Left publishes reports on firms that he claims are overvalued or are engaged in fraud. Left is known for advising investors on short selling and has often appeared on various media outlets such as CNBC and Bloomberg to talk about his opinions on stocks. In 2017, Left was called 'The Bounty Hunter of Wall Street' by The New York Times. Left gained further notoriety following his announced short of GameStop, precipitating a short squeeze that has hurt him and other short sellers in the short term.
Securities market participants in the United States include corporations and governments issuing securities, persons and corporations buying and selling a security, the broker-dealers and exchanges which facilitate such trading, banks which safe keep assets, and regulators who monitor the markets' activities. Investors buy and sell through broker-dealers and have their assets retained by either their executing broker-dealer, a custodian bank or a prime broker. These transactions take place in the environment of equity and equity options exchanges, regulated by the U.S. Securities and Exchange Commission (SEC), or derivative exchanges, regulated by the Commodity Futures Trading Commission (CFTC). For transactions involving stocks and bonds, transfer agents assure that the ownership in each transaction is properly assigned to and held on behalf of each investor.
r/wallstreetbets, also known as WallStreetBets or WSB, is a subreddit where participants discuss stock and option trading. It has become notable for its colorful and profane jargon, aggressive trading strategies, and for playing a major role in the GameStop short squeeze that caused losses for some US firms and short sellers in a few days in early 2021.
Keith Patrick Gill is an American financial analyst and investor known for his posts on the subreddit r/wallstreetbets. His analyses of GameStop stock, and details of his resulting investment gains—posted on Reddit under the username DeepFuckingValue (DFV) and on YouTube and Twitter as Roaring Kitty—were cited as a driving factor in the GameStop short squeeze of January 2021, and as a spark for the subsequent trading frenzy in retail stocks. The rising stock value allowed Gill to turn a US$53,000 investment into one worth close to $50 million.
In January 2021, a short squeeze of the stock of the American video game retailer GameStop and other securities took place, causing major financial consequences for certain hedge funds and large losses for short sellers. Approximately 140 percent of GameStop's public float had been sold short, and the rush to buy shares to cover those positions as the price rose caused it to rise even further. The short squeeze was initially and primarily triggered by users of the subreddit r/wallstreetbets, an Internet forum on the social news website Reddit, although a number of hedge funds also participated. At its height, on January 28, the short squeeze caused the retailer's stock price to reach a pre-market value of over US$500 per share, nearly 30 times the $17.25 valuation at the beginning of the month. The price of many other heavily shorted securities and cryptocurrencies also increased.