Re:GameStop Is Rage Against the Financial Machine
by amluto on Wednesday January 27, 2021 @11:09PM
(#25938035)
I’m not convinced that the economics work like this. Suppose there are n real shares, i.e. longs - shorts = n. A short squeeze happens if the number of shorts exceeds the number of long shares that aren’t trying to squeeze the shorts. That’s longs - squeezers < shorts. Rearranging gives n < squeezers. So the short holders are in trouble if the number of squeezing shares exceeds the number that actually exist.
Imagine there’s a near-squeeze situation, and someone shorts more shares. This drives the price down, which makes it less expensive for squeezers to buy shares, which exacerbates the problem.
This is complicated by margin calls and their institutional equivalents. This cuts both ways. Enough downward price pressure could cause some longs to get margin called. But more shorting also means more danger.
If I were the SEC, I would consider restricting the total short interest to a fixed fraction of total outstanding shares to improve market stability. I don’t know whether this would be a good policy overall.
Imagine there’s a near-squeeze situation, and someone shorts more shares. This drives the price down, which makes it less expensive for squeezers to buy shares, which exacerbates the problem.
This is complicated by margin calls and their institutional equivalents. This cuts both ways. Enough downward price pressure could cause some longs to get margin called. But more shorting also means more danger.
If I were the SEC, I would consider restricting the total short interest to a fixed fraction of total outstanding shares to improve market stability. I don’t know whether this would be a good policy overall.