What is a short squeeze?

How it starts

Someone who has sold short has shares to buy back. If the price rises, the loss grows without limit and the broker asks for more money. Many short sellers then buy back, by choice or because the broker closes the position. Every buy-back is a purchase, and when sellers are few those purchases can push the price up further. That is the squeeze.

The larger the share of a company's stock that is sold short, the more buyers may be needed at once. US exchanges publish short interest twice a month.

GameStop in January 2021

In January 2021 GameStop was the only stock where the SEC's staff saw short interest larger than all the company's shares. That is possible because a borrowed share that was sold can be lent again by the buyer. The table shows each trading day from the close on January 11, and what someone who sold short for $10,000 that day had lost.

On Jan 27, 2021 the stock stood 1643% above the close on January 11, and a short sale of $10,000 was $164,278 down. By Feb 5, 2021 the price was −82% from the top.

Was it a short squeeze?

The SEC's staff saw that short sellers buying back added to the rise in some periods, especially January 22 to 27. But their buying was a small part of all buying, and the price stayed high after the buy-backs would have faded. The staff concluded that it was buyers' belief in the stock, not the short sellers' buying to cover, that kept the price up for weeks. A heavily shorted stock does not rise just because it is shorted.

Sources

• US Securities and Exchange Commission, Staff Report on Equity and Options Market Structure Conditions in Early 2021, October 14, 2021, read on November 6, 2026: short interest above the number of shares, short sellers' buying from January 22 to 27, and the conclusion on what kept the price up.