Squeezing the Shorts in Small Cap Stocks

54 Pages Posted: 22 Nov 2019 Last revised: 9 Dec 2019

See all articles by Roberto Riccò

Roberto Riccò

Bocconi University - Department of Finance

Date Written: November 12, 2019

Abstract

In the summer of 2018 the shares of New Concept Energy and Avalon Holdings increased more than 500% and then fell back down without any news or rumours about the companies. Using court documents we reconstruct the trades by an alleged manipulator, we analyze his strategic trading behavior and how the market reacted to his trades. We find that the market on average was not able to identify the alleged manipulator’s trades and that his trading costs were lower than those of the other market participants. Consistent with Allen and Gale (1992) we find that the manipulator exhibits the same behavior as informed investors in Collin-Dufresne and Fos (2015), Kacperczyk and Pagnotta (2018), Garriott and Riordan (2019). We argue that Regulation SHO mandatory settlement deadline easily binds for small-cap stocks, making manipulation in these stocks more likely.

Keywords: Short Squeeze, manipulation, regulation SHO

JEL Classification: G10, G14, G28

Suggested Citation

Riccò, Roberto, Squeezing the Shorts in Small Cap Stocks (November 12, 2019). Available at SSRN: https://ssrn.com/abstract=3484847 or http://dx.doi.org/10.2139/ssrn.3484847

Roberto Riccò (Contact Author)

Bocconi University - Department of Finance ( email )

Via Roentgen 1
Milano, MI 20136
Italy

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