What were the biggest short squeezes in history?

What are short squeezes?

Short squeezes are market events where traders push up the value of a stock, forcing short sellers to buy (go long) to minimise their losses.

As the short sellers buy stock, the share value rises even higher, increasing the profits of the short-squeezing traders.

Find out more about the various types of market squeeze

The greatest short squeezes of all time

1. Piggly Wiggly
2. Volkswagen
3. Herbalife
4. Tesla
5. GameStop

1923: Piggly Wiggly short squeeze

When Clarence Saunders opened the first Piggly Wiggly grocery store in Tennessee in 1916, it was a revelation. For the first time, customers could roam the aisles of a grocery store and pick out their own products.

Within six years, there were Piggly Wiggly stores all over the Southern and Midwest regions of the US, and Piggly Wiggly stock was being listed on the New York Stock Exchange (NYSE).

But then Clarence Saunders overplayed his hand.

What happened?

After market traders started to short Piggly Wiggly stock, Saunders vowed to hit back. Using his own money and $10 million from a group of bankers, he bought up all available Piggly Wiggly stock, pushing the price of the stock up by approximately 50%.

By March 1923, Saunders owned all but 1128 shares of the company’s outstanding shares, and he called on the short sellers to pay up. The following day, the NYSE suspended trading in the stock, before permanently stopping all trading in Piggly Wiggly on 26 March. The suspension gave the short sellers time to buy up most of the company’s 1128 outstanding shares and cover their positions.

Saunders ended up with complete control of Piggly Wiggly stocks, millions of dollars of debt and no ability to sell his shares on the public market. He made an early attempt at crowdfunding by taking out ads in local papers saying that the failure of Piggly Wiggly would shame the whole South. But the campaign fizzled out and Saunders was forced to turn over his stock and file for bankruptcy.

2008: Volkswagen vs Porsche

For a brief moment in October 2008, Volkswagen was the most valuable company in the world, at more than €1000 per share. And it all started with a surprise announcement by rival car manufacturer Porsche.

What happened?

Porsche and Volkswagen had a long history of working together, and Porsche had consistently maintained a minority stake in Volkswagen. But on 26 October 2008, Porsche revealed that it had gained control of 74% of Volkswagen’s voting shares by buying up almost all of the company’s circulating stock.

Of course, by October 2008 the world was in the grip of the global financial crisis, and short-selling was rampant. The Porsche Volkswagen short squeeze was only possible because so much Volkswagen stock (approximately 12.5%) was on loan to short sellers at the time of the Porsche announcement. When the market opened the following day, those short sellers raced to exit their positions to minimise their losses, buying more stock and inflating the share price even more.

On 27 October 2008, Volkswagen’s shares opened at €348 and closed at €517 – a rise of almost 150%. By Tuesday, the stock peaked at €999 per share, while short-selling costs were estimated to be in the tens of billions. Porsche’s chief executive officer (CEO) Wendelin Wiedeking was ultimately charged with market manipulation for his role in the short squeeze, but the charges were later dropped.

The big short on Herbalife

In December 2012, Bill Ackman, a hedge fund manager at Pershing Square Capital Management , made a short bet against nutritional supplements company Herbalife. He explained his decision in a three hour presentation, where he described Herbalife as a pyramid scheme that was certain to go bust.

What happened?

Ackman was so confident that he spent $1 billion shorting Herbalife, when its stock was trading at approximately $45. Rival hedge fund manager Carl Icahn publicly disagreed with Ackman’s bet, and a battle of the egos saw Icahn take a 26% share in Herbalife, making him the company’s largest shareholder, and netting him $1 billion over the next few years.

For Ackman, it was the worse short squeeze ever. By the time Pershing exited the short position in February 2018, the stock was trading at more than $90 per share, and the company is still very much in existence today.

2020: Tesla stock price rally

At the start of August 2020, Tesla's shares were close to hitting $300 for the first time in the company’s history.

By the end of August, Tesla shares were worth almost $450. Market commentators puzzled over the surprise rally, which did not coincide with any new product launches or other obvious market-moving activity.

What happened?

In hindsight, a number of issues probably caused the rally – electric vehicles were becoming more popular, the company was preparing to join the S&P 500 , and the board had just announced a five-for-one stock split, which meant that anyone who bought Tesla shares before 21 August 2020 would effectively get four shares for free (for one bought).

But the main driver seems to have been short sellers. By mid-2020, Tesla was the most shorted stock in the world, reflecting Wall Street's view that the company was overvalued. Instead, the stock benefitted from a run of good press and strong financial reports, costing short sellers approximately $40 billion by the end of the year.

The Tesla short squeeze may be one of the worst short squeezes in history, as slow but positive growth in Tesla’s stock meant that short selling losses added up slowly over the course of many months.

2021: The GameStop surge

One of the greatest short squeezes in history started on a SubReddit, where hundreds of thousands of retail investors banded together to drive the price of GameStop shares up to an all-time high of almost $500. Before the surge, GameStop’s stock had been valued at $17.25.

What happened?

At the time, approximately 140% of GameStop’s public float had been sold short, so as the rally gained pace, these short sellers were forced to cover themselves by buying as much stock as possible, thereby contributing to the surge.

Low-cost, light-touch investment apps such as Robinhood allowed retail investors to buy stock in tiny amounts, meaning that anyone could join in the GameStop movement. Meanwhile, Reddit users shared investment tips and strategies in layman’s terms, introducing many people to the world of investing for the very first time.

On 28 January 2021, Robinhood intervened and halted the purchase of GameStop shares and other securities, saying that they could not meet the collateral requirements to execute the deals. This decision has sparked a number of investigations and ongoing criticism from traders on Reddit.