It’s no surprise that short sellers got off to a rocky start in 2021 as an army of individual investors ran up shares of heavily shorted stocks in a battle that’s rocked Wall Street.
In the year to date, short sellers are sitting on total losses of $71 billion versus gains of $16.8 billion, leaving them with a net loss of more than $54 billion, data analytics company Ortex said on Thursday.
Traders who short stocks are making a bet that the price of the security will fall. In equities, that entails borrowing shares to sell with the hope of buying them back later at a lower price. If the price instead rises, the short seller may be forced to buy back at a higher price. In a short squeeze, a stampede of such short covering can create feedback loops.
That’s exactly what’s been happening this week. A battle between individual investors, organized via Reddit’s WallStreetBets forum, and short sellers has dominated financial markets. The focus has been on shares of GameStop Corp.
a bricks-and-mortar videogame retailer that had attracted heavy short interest.
While GameStop shares were down 26% in volatile trade Thursday as brokers restricted activity, they remain up around 277% so far this week and more than 1,200% since the end of December.
Losses on short trades against GameStop totaled $1.03 billion, according to Ortex, but that wasn’t the biggest loser. Losses on shorts against electric car maker Tesla Inc.
topped the list at nearly $6.8 billion in the year to date, Ortex said. Tesla shares are up around 19% so far in January.
Major U.S. stock indexes tumbled on Wednesday, suffering their biggest losses since October as the pain from losing short positions was seen forcing some hedge funds to also liquidate winning long positions.
Benchmarks took back a chunk of those losses Thursday, with the Dow Jones Industrial Average
up around 450 points, or 1.5%, in the final half-hour of trade, while the S&P 500
was also up 1.5%.