So, they shorted the stock in much the same fashion that we have seen with AMC, Blackberry, GameStop, and more. These days, there are also sites like Reddit and others who have attracted short squeeze groups like WallStreetBets. Here is an example of WeBull’s take on short interest and days to cover. Notice how as short interest rises, days to cover usually does, too. As unprecedented as the situation seems at the moment—and it is, since such coordination among retail investors has been rare—it’s similar to something that happened to Porsche and Volkswagen more than a decade ago, though for different reasons.
As a result, Hedge funds shorting VW lost close to $30 billion, while Porsche made billions. Ironically, this was when industry car sales were doing exceptionally badly. You might be surprised to learn that Volkswagen (VW), which is one of the largest and most well-known automakers in the world, became the center of a major short squeeze in the midst of the Great Financial Crisis of 2008. Shorting a stock or a sector because it’s the “obvious” thing to do can and has historically made men and women cry on the phone and also lose fat stacks of money. Volkswagen often comes to mind when investors try to find a short squeeze comparable to GameStop’s jaw-dropping spike last week.
What is short selling?
Therefore, it became increasingly difficult for short sellers to acquire VW shares to cover their short positions when the share price started rising after Porsche’s press release. This in turn exerted increasing price pressure on VW’s stock and resulted in estimated losses of more than EUR 20 billion for investors that had entered into these short-sell trades. By measuring the coefficient atr trailing stop of variation in Volkswagen stock prices between the seven exchanges in 15-minute intervals, I find that abnormal trading conditions can be detected by 10 am on the day before the price spike. Those with short positions may be able to exit while the Volkswagen was trading at €350, perhaps saving them from being closed out the next day as the price headed towards €1000.
Our chat rooms will provide you with an opportunity to learn how to trade stocks, options, and futures. You’ll see how other members are doing it, share charts, share ideas and gain knowledge. January 28th, 2021, was a date that will go down in the books for video game retailer GameStop. Fast forward to 2021, trade bonds online and prices soared in one day by 400% to $483. We see a rapid price rise followed by a swift fall from grace with any short squeeze. While the bulk of the market was focused on a handful of retail stocks, rogue traders saw an opportunity to repeat the 2008 feat on Volkswagen stock – and briefly succeeded.
- You have the option to trade stocks instead of going the options trading route if you wish.
- The German financial services regulator BaFin took note of the unprecedented rise in Volkswagen stock price and started examining evidence of market manipulation, insider trading or other wrongdoings.
- In this paper I study the information surrounding the extraordinary event in Volkswagen stock that occurred on Tuesday 28 October 2008.
- Based on the stock’s average trading volumes, it would take traders 0.4 days to cover their open positions without necessarily prompting a surge in the price of VWAGY.
- As unprecedented as the situation seems at the moment—and it is, since such coordination among retail investors has been rare—it’s similar to something that happened to Porsche and Volkswagen more than a decade ago, though for different reasons.
According to International Banker, it reportedly led to losses of $30bnfor all the investment funds that had exposure to the stock. In 2021, the price of Volkswagen stock spiked during the so-called “meme stock” short-squeeze that affected the share price of companies such as GameStop (GME) and AMC Entertainment (AMC). However, Porsche did not stop buying shares of VW as market participants expected.
TRADING STOCKS IN THE BULLISH BEARS COMMUNITY
Achieving this requires more than the traditional analysis of trade price and volume. The quantitative characteristics of the price and volume show nothing unusual during the squeeze besides the abnormally high price, by which time any trading opportunity has already passed. To gain predictive power I combine trading information from the seven regional stock exchanges around Germany – specifically the price variation among them – information which is more commonly ignored. The Volkswagen short squeeze occurred because of the company’s announcement that it would be transitioning to electric vehicles. This news caught many investors off-guard, and those who were betting against the stock were forced to buy it back at higher and higher prices.
However, they were caught off guard when Volkswagen released better-than-expected earnings, sending the stock soaring. The hedge fund managers were forced to cover their short positions, driving the stock even higher. If you thought that the market’s latest short was the first of its kind, you’re highly mistaken. Hedge funds and institutional investors have been shorting stocks for centuries both domestically and abroad. In 2008 — smack dab in the middle of the Great Recession — one stock reaped the capital of a short squeeze — Volkswagen. Ultimately, those hedge funds that had shorted VW stock ended up losing an estimated $30 billion from their trades.
What Was The Biggest Short Squeeze Ever In History?
This can be caused by a number of factors, including rumors, changes in fundamentals, and even technical factors. Short selling is a strategy that can be used when an investor believes a stock is overvalued and is likely to fall in price. The investor borrows shares of the stock from another investor and sells them, hoping to buy the shares back at a lower how to buy nano price so they can return them to the original owner and pocket the difference. Here, you can see that the Volkswagen share price faltered to about the same level that it was at 60 days before the peak, and it only took another 60 days to do so. We have yet to see how things with GameStop (and other squeezed stocks from early 2021) will play out.
However, since then, the price has progressively declined and continues to be on a downtrend as it has failed to make a higher high during that period. It appears that the previous 2008 Volkswagen squeeze was considered by traders as an indication that the stock was sensitive to being squeezed again in 2021. If the Volkswagen story tells us anything, it’s that market manipulation can come from both sides of the table.
Does the short squeeze lead to market abnormality and antileverage effect? Evidence from the Gamestop case
This sometimes happens with companies that are on the verge of filing for bankruptcy. By Sunday, October 26, the news was circulating that less than 6 percent of VW voting stock was available in the market. GameStop, a mall-based video game store suffering from both reduced foot traffic and the growth of online games during the pandemic, was seeing its stock decline due to these natural market conditions.
Explaining Gamestop Short Squeeze using Ιntraday Data and Google Searches
While individual approaches may be as diverse as the market participants, their goal remains the same — to provide useful trading signals ahead of anticipated price movements. Short sellers have lost billions of dollars betting against Tesla this year, and some analysts believe they may be feeling pressure to cover their positions. The Volkswagen short squeeze of 2008 is widely considered to be one of the greatest short squeezes in history.
The Volkswagen Short Squeeze
The short squeeze started on 26th October 2008, after Porsche announced that it had increased its stake in Volkswagen. Soon, the news broke out that with Porsche’s increased stake in Volkswagen, only 6% of the Volkswagen shares were available for trading compared with the requirement of around 12% shares for covering outstanding short positions. In late 2007, Volkswagen stock was trading at around €3,000 per share. A group of hedge fund managers decided to bet against the company by short selling its stock.
This provided an incentive for Porsche to manipulate VW’s stock and save itself from insolvency. In many countries such as the U.S., market regulators would have quickly punished this kind of abuse. However, this example illustrates that in Germany, there has been a lack of effective enforcement, and so this did not occur—neither by the German securities regulator BaFin nor by subsequent court proceedings. While stock price manipulations such as squeezes and corners have been outlawed in the U.S. since 1934, legal limitations have only been introduced and enforced in many European countries in recent years. This paper uses the German financial market system as a unique setting that represents a market with imperfect disclosure requirements, low shareholder protection, and most importantly weak enforcement of securities laws.