Posted by Angel Tengulov (University of Kansas School of Business), on
Thursday, September 28, 2023 
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Angel Tengulov is an Assistant Professor of Finance at the University of Kansas School of Business. This post is based on a working paper by Franklin Allen, Marlene Haas, Matteo Pirovano, and Angel Tengulov. Related research from the Program on Corporate Governance includes Stock Investors’ Returns are Exaggerated(discussed on the Forumhere) by Charles Wang, Jesse Fried, and Paul Ma.
A short squeeze is triggered if there is pressure on short sellers to cover their positions because of a sharp price increase or a recall of borrowed shares. This drives short sellers to close their positions early. In this article, we construct a novel measure for identifying short-squeeze events triggered by sharp price increases, i.e., a market squeeze. This measure is distinct from and complimentary to existing lender squeeze measures, i.e., measures that identify short squeezes based on borrowed shares that are recalled by the lender. The market squeeze measure was motivated by historical short-squeeze events described in the extant empirical literature on the topic, such as the January 2021 “meme” stocks squeezes (see e.g., Allen, Haas, Nowak, Pirovano, and Tengulov (2023)) and the 2008 Volkswagen squeeze (see e.g., Allen, Haas, Nowak, and Tengulov (2021)) and can be applied to all types of financial markets including equity, commodities, and bond markets.
In the study, we document the time-series evolution and cross-industry dispersion of both market and lender short squeezes in the US and the European Union (EU). We find that short-squeeze events are rare and short-lived in nature. However, a significant proportion of unique firms experience a short-squeeze in a given year in both the US and the EU. The cross-industry analysis reveals that in the US short squeezes are more frequent in the energy sector (coal and mining stocks) as well as the financial and tobacco industries, whereas in the EU short squeezes are more frequent in the tobacco and coal industries. We further investigate the determinants of short-squeezes and their costs.
International evidence about the prevalence and costs of short squeezes is important for at least two reasons. First, despite the fact that behavior intended to squeeze short sellers is illegal in most countries short-squeeze events continue to occur, with the January 2021 meme-stock squeeze events being the most prominent recent examples. Therefore, it is important to document the time-series evolution and cross-industry dispersion of short squeezes.
Second, the evidence in our paper might help inform regulators regarding the new Securities and Exchange Commission (SEC) short-selling regulation proposal. In particular, the SEC has proposed a new regulation that is intended to provide greater transparency through the publication of short-selling information. One concern related to the proposed regulation is that disclosing more short-sale information may also increase the risk of short squeezes. The regulatory proposal is somewhat similar to the short-sale disclosure requirements that the EU implemented in 2012. Our data sample covers the period before the EU implemented short-sale disclosure requirements and the period after. We do not find an increase in the short-squeeze frequency in the EU in the period after compared to before. This, in turn, somewhat mitigates concerns that short squeezes might become more prevalent once the new short-sale disclosure requirements are implemented.
Further, in our paper, we provide a comparison of relevant regulations in the US and the EU. Finally, we also review the extent to which academic literature has studied short squeezes and provide directions for future research. The complete paper is available for downloadhere.
FAQs
The number of strict short squeezes varied considerably over time. Many years had close to zero while others had more than 100. The five most active short squeeze months, normalized by the total number of contemporary equity listings, were February 2021, May 2020, October 2008, February 2000, and October 1974.
What was the biggest short squeeze in history? ›
What Was the Bigggest Short Squeeze in History? The biggest short squeeze in history happened to Volkswagen stock in 2008.
Are short squeezes predictable? ›
While short squeezes can't be predicted with 100% accuracy, there are factors that can contribute to the proverbial spark lit in a kerosene-soaked warehouse. These signs include: High short interest in a stock may lead to a short squeeze. Short interest is considered “high” when it rises above the 20% mark.
Is short Squeezing Legal? ›
Although short squeezes may occur naturally in the stock market the U.S. Securities and Exchange Commission (SEC) states that abusing short sale practices is illegal.
How much can a stock go up in a short squeeze? ›
But there's no ceiling on the stock. You can sell it at $10 and then be forced to buy it back at $20 … or $200 … or $2 million. There is no theoretical limit on how high a stock can go. The first way to avoid getting squeezed is simply to avoid shorting.
When was the last short squeeze? ›
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.
How rare are short squeezes? ›
We find that short-squeeze events are rare and short-lived in nature. However, a significant proportion of unique firms experience a short-squeeze in a given year in both the US and the EU.
Has a short squeeze ever worked? ›
One of the most famous, significant and big short squeezes of the 21 century is the sharp rise in the stock price of German car maker Volkswagen AG (XETR: VOW) in 2008. Between 24 and 28 October in that year, the company's share price recorded a 376.65% growth, up from 210.85 to 1005.01 EUR.
Has any penny stocks made it big? ›
Sure, some penny stocks turned out to be massive success stories, like Apple, Ford Motor, and Monster Beverage. Find a similar success story like those top penny stocks, and you stand to make a fortune. However, you have to be willing to do the research to find them in a sea of duds.
What is the best indicator for short squeeze? ›
Short interest ratio
The higher the ratio, the higher the likelihood short sellers will help drive the price up. A short interest ratio of five or better is a good indicator that short sellers might panic, and this may be a good time to try to trade a potential short squeeze.
In general, short squeezes tend to last somewhere between several days and several months. There is no real “typical” length for a short squeeze, as each one is unique.
Can a short squeeze be stopped? ›
Short squeezes are usually short-lived and end when short sellers have fully exited their positions or stop buying shares to cut their losses.
What is the difference between shorting and short squeeze? ›
If a stock's price rises quickly, then short sellers sometimes scramble to close out their positions as rapidly as possible. A high volume of investors who are shorting a stock and racing to exit their positions at the same time creates a short squeeze.
How do you know if there is a short squeeze? ›
Signs of a Short Squeeze
These are: An asset trading near its 52-week lows and the price is much lower than the fair value estimated by experts. The reasons for the gap may be many, but markets eventually correct and settle closer to the fair value. This is the minimum short squeeze price.
What triggers a short squeeze? ›
Short squeezes are typically triggered either by unexpected good news that drives a security's price sharply higher or simply by a gradual build-up of buying pressure that begins to outweigh the selling pressure in the market.
How long does a short squeeze usually last? ›
In general, short squeezes tend to last somewhere between several days and several months. There is no real “typical” length for a short squeeze, as each one is unique.
How do you know if a short squeeze is happening? ›
Signs of a Short Squeeze
These are: An asset trading near its 52-week lows and the price is much lower than the fair value estimated by experts. The reasons for the gap may be many, but markets eventually correct and settle closer to the fair value. This is the minimum short squeeze price.
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