Squeezing Shorts Through Social Media Platforms

Abstract

At the end of January 2021, a group of stocks listed on US stock exchanges experienced sudden price increases, which – coupled with high short interest – led to short-squeeze episodes. We find that these events were fueled by retail traders coordinating on social media platforms. Options markets also played a central role. Using unique data from social media platforms we provide a comprehensive account of these short squeezes and show that they significantly impeded market quality for the stocks at issue and their competitors. Thus, retail trader coordination can lead to market-distorting events and impair market efficiency.

Keywords: Limits to arbitrage; Short selling; Short squeeze; Gamma squeeze; GameStop, Social media platforms, Retail investors

JEL Classification: G10; G12; G13; G14; G18