With shares in heavily-shorted real estate services firm Rocket surging more than 70 per cent this week, a new study by London-based AI start-up causaLens explores the ways in which so-called ‘meme’ stocks, popular with online amateur traders, could potentially face short squeezes.
With shares in heavily-shorted real estate services firm Rocket surging more than 70 per cent this week, a new study by London-based AI start-up causaLens explores the ways in which so-called ‘meme’ stocks, popular with online amateur traders, could potentially face short squeezes.
Using short interest data provided by 2iQ, a transaction and short interest rate data provider, the causaLens study examined four such names – GameStop, Tesla, AMC, and Nokia – popular on the sub-Reddit forum WallStreetBets, as well as two large established names, Google and Apple.
Among other things, it probed the percentage of shares available for shorting which have been actually been shorted, along with certain contract types, including the volume of those using non-cash collateral, and volatility patterns in shorted names.
“These contracts are a useful indicator of the surge of retail investors into a stock, since non-cash collateral is typically used only by institutional investors,” causaLens’ analysis said. “The rapid rises in price in the Reddit meme stocks coincides with a drop in the ratio of contracts using non-cash collateral.”
In January, amateur retail investors piled into Texas-based video game store chain GameStop, driving its share price up some 400 per cent, triggering huge losses for several hedge funds betting against the company. But the subsequent collapse in GameStop shares left many online traders in the co-ordinated raid nursing colossal losses.
This week Rocket Companies’ stock spiked more than 70 per cent on Tuesday, before plummeting 32.7 per cent the following day, in what some analysts see as a renewed push by Reddit users against hedge funds. Rocket, whose businesses include online mortgages and property valuations and settlement services, has been a target of short sellers lately, with almost 40 per cent of its available shares reportedly being sold short.
causaLens’ study also measured the interaction between the loan rate and utilisation, noting that as the stock becomes more highly shorted, the loan rate goes up, ultimately making the stock more expensive to bet against. The data suggested that high interest rate, high utilisation names – such as GameStop and AMC – are at particular risk of a short squeeze.
Its heat map also charted the monthly volatility of returns between the highest utilised stocks compared to those names utilised the lowest. It found that while the distributions of returns are generally similar, the highly utilised stocks have a much higher volatility, indicative of short squeezes.
The fallout from the GameStop saga continues to reverberate across the hedge fund industry. Last month, US hedge fund titan Kenneth Griffin, whose Citadel Securities market maker was caught up in the trading frenzy, called for an overhaul of the settlement process in markets.
