The 5 Biggest Short Squeezes in Financial History

Short squeezes have been one of the most discussed finance topics in 2021. Intense speculation about a potential short squeeze in the stock of video games retailer GameStop helped its shared price jump from less than $20 in early January to an all-time high of $483 before the end of the month. GameStop’s short squeeze trading frenzy was spurred on by Reddit’s Wall Street Bets subreddit. Other companies such as movie theater chain AMC and pioneering spaceflight company Virgin Galactic have also seen their stock price soar amid short squeeze speculation.

Google Trends show that searches for the term short squeeze have followed a similar pattern to these companies’ abnormally volatile stock performance. Searches in January 2021 were ten times higher than those in the fall of 2020.

While short squeezes are currently a hot topic in financial markets, they are far from a new phenomenon.

What is a short squeeze?

The most common form of investing in stocks is to take a long position. This means buying an asset in the hope that it will rise in price in the future. Shorting reverses this and makes it possible for investors to make a profit when an asset falls in price.

Physical short selling involves borrowing a stock or other asset, selling it, then buying the asset back later to return it to the lender. Short sellers do this in the hope that the price they can sell the asset for now will be higher than the future price they are forced to buy at. Short sellers typically pay a fee to the lender while maintaining their short position.

Naked short selling involves short selling an asset without actually borrowing this asset. The United States Securities and Exchange Commission introduced legislation to restrict naked short selling in 2005. These restrictions tightened after a major surge in short selling of big financial firms in the wake of the 2008 financial crisis.

Short squeezes occur when the price of a heavily shorted asset begins to rise. In extreme cases, this can lead to a huge sudden uptick in an asset’s price and enormous losses for short sellers.

1. The GameStop Short Squeeze

In January 2021, a post on Wall Street Bets identified GameStop as having enormous potential for a short squeeze. The post alleged that major hedge funds held shorts equal to around 140% of publicly traded shares in GameStop.

The post sparked a frenzy of activity from small-time retail investors. Many posts and comments in Wall Street Bets characterized the pursuit of a short squeeze as revenge on hedge funds and Wall Street for the financial crisis of 2008.

GameStop’s stock price exploded as the front page of Reddit became dominated with posts related to the short squeeze. On January 28, the popular trading app Robinhood suspended purchases of GameStop shares. Popular figures ranging from billionaire Elon Musk to congresswoman Alexandria Ocasio-Cortez voiced support for the Reddit-driven retail investors in their battle against the hedge funds.

In February, prominent individuals from both sides of the short squeeze were grilled in a five-hour hearing in Congress. GameStop quickly fell away from its $483 high but continued trading at levels well above its $17.25 share price on January 1. Interest in the short squeeze then surged again in May as GameStop shares rocketed back above $240.

2. The Tesla Short Squeeze

Tesla is another recent example of a short squeeze which benefitted many retail investors subscribing to the Wall Street Bets forum. Shares in the electric vehicle company saw one of the most meteoric rises in history between late 2019 and early 2020, moving from less than $50 in October 2019 to a high above $900 in January 2021.

Many theories were proposed for Tesla’s incredible stock performance. The company’s charismatic figurehead Elon Musk commands a loyal following online. His tweets were largely responsible for sending the cryptocurrency Dogecoin skyrocketing from fractions of a cent to more than 72 cents per coin in the first few months of 2021. Tesla’s rise was also attributed to an increased interest in green energy and electric vehicles after Joe Biden’s victory over Donald Trump in the 2020 U.S. Presidential Election.

But some analysts think that a short squeeze was one of the main drivers of Tesla’s rapid ascent. An estimated $20 billion of Tesla shares had been shorted prior to the rapid stock price rise. The pump saw short interest in Tesla fall by a factor of three as its stock rose 340% year-on-year. Short sellers may have been forced to buy up Tesla’s price during the rally, creating additional buy pressure which helped fuel its incredible rally.

3. The Volkswagen Short Squeeze

Tesla wasn’t the first automobile manufacturer to see its stock soar amid short squeeze speculation. Tesla became the most valuable automobile company at the height of its stock price frenzy. In 2008, Volkswagen briefly became the most valuable company in the world.

Fellow German automobile giant Porsche had long been attracted to acquiring Volkswagen. Porsche spent several years in the 2000s building up its holding in Volkswagen shares. Amid the financial chaos of October 2008, Porsche announced it had acquired the 74% of voting shares necessary under German law to assert ownership over Volkswagen.

Within a few days of the announcement, Volkswagen shares rocketed from €210 to a peak of €999. Around 12.5% of Volkswagen stock was on loan to short sellers when Porsche’s ownership announcement was made. This prompted a frenzy of short sellers buying up stock to cover their losses, pushing the share price higher. At the peak of the panic, Volkswagen achieved a $420 billion valuation, surpassing companies from Exxon Mobil to Microsoft.

The surge was short-lived. Within a few days, Volkswagen shares dropped by more than 50% to less than €500. By December, the price had halved again.

4. The Northern Pacific Railroad Short Squeeze

Short sellers of Tesla and Volkswagen would have done well to study the history of the New York Stock Exchange’s very first stock market crash. The stock market crash was precipitated by a battle which pitched railroad executive James J. Hill and legendary financier J.P. Morgan against E.H. Harriman. Both sides sought total control over the Northern Pacific Railway, pushing its stock to new highs as they accumulated a 94% stake in the railroad between them.

Third parties saw an opportunity to make money shorting shares in the Northern Pacific Railroad. But with both sides in the battle for control of the railroad refusing to sell, short sellers were forced to pay ever-higher prices to cover their positions.

These third parties were then forced to liquidate other positions to buy the skyrocketing railroad shares. Widespread market contagion followed, sending the entire New York Stock Exchange plummeting.

5. The Piggly Wiggly Short Squeeze

Most historic examples of short squeezes have been ruinous for short sellers. The Piggy Wiggly short squeeze ended up ruining the man doing the squeezing.

Piggly Wiggly grocery stores were a pioneering phenomenon in the early 20th Century. Starting with a few grocery stores in the Southern United States, founder Clarence Saunders soon built up a nationwide empire of over 1,200 stores. These stores delighted customers by allowing them to collect items from the shelves directly instead of making their orders to a clerk.

In 1922, Piggly Wiggly was floated on the New York Stock Exchange. Clarence Saunders’ fortunes continued to rise as investors reacted with the same enthusiasm as shoppers. But by the end of the year, a handful of failed Piggly Wiggly franchises in the northeast led some investors to believe the stock had been overvalued. A spate of short selling followed.

Like the GameStop retail investors of a century later, Saunders decided to fight the short sellers at their own game. Saunders took out a loan of $10 million to buy up more than 100,000 shares in his own company. Short sellers began to panic about an impending short squeeze.

Between 1922 and 1923, shares in Piggly Wiggly rose from $39 to $124. Wall Street fought back. The New York Stock Exchange suspended trading in Piggly Wiggly shares. Undeterred, Saunders told the short sellers they could buy their shares back at $150 apiece. If they didn’t take up his offer immediately, the price would rise to $250.

The short sellers called Saunders’ bluff and Piggly Wiggly was soon permanently booted of the New York Stock Exchange. Mounting debts used to buy the now fast-depreciating shares ruined Saunders. The Piggly Wiggly empire promptly collapsed.

The Short Squeeze Risk

The GameStop short squeeze has already caused huge losses for hedge funds and other short sellers. Many retail investors have shown determination to hold out for the maximum profit possible. With the Panic of 1901 serving as an example of how crazy short squeezes can get, both the United States Securities and Exchange Commission and Congress have been closely monitoring this unusual situation. But as the case of George Saunders and Piggly Wiggly shows, there is risk on both sides of a short squeeze situation.