Second, the data available in modern markets means that the precise way in which this kind of manipulation affects the operation of the market can be studied in a detailed way that historical manipulations cannot. The VW squeeze has been damaging to market efficiency in Germany because it has demonstrated to those thinking of shorting a security that they bear the risk of being caught in a short squeeze. A corner is an extreme form of short squeeze, when the buy side has almost complete control of all floating shares. In a squeeze, short sellers find it difficult to acquire the securities they need to cover their short position because of a shortage of floating supply and the price rises as a result. Among the most important limits to this arbitrage process is the possibility of squeezes and corners. If the price of an asset is too low relative to its discounted future cash flows then arbitrageurs will buy it and drive the price up if the price is too high, they will short sell it and drive the price down. The latter relies to a large extent on the principle of arbitrage.
![short squeeze definition short squeeze definition](https://www.aktiekunskap.nu/wp-content/uploads/2021/02/short-sqeeze-fingerprint.png)
The reason is that behavior precipitating short squeezes is illegal in most countries, which in turn helps to ensure capital market efficiency.
![short squeeze definition short squeeze definition](https://tradingsim.com/wp-content/uploads/2011/07/short-squeeze.png)
First, while short squeezes did occur with some frequency historically, extreme examples such as this one are almost unknown in recent times.
![short squeeze definition short squeeze definition](https://www.investorsunderground.com/wp-content/uploads/2016/07/kbioshortsqueeze.jpg)
Understanding what happened prior to and during this sequence of events is important for at least three reasons. We argue that it resulted in a profit of at least EUR 6 billion and allowed the company to avoid bankruptcy. The rise in VW’s price, that the short squeeze caused, was extremely advantageous to Porsche. This in turn exerted increasing price pressure on VW’s stock and resulted in more than EUR 20 billion losses for investors that had entered into these short-sell trades. Therefore, it became increasingly difficult for short sellers to acquire VW shares to cover their short positions when the share price started rising after Porsche’s press release. This implied that the free-float of VW’s shares was decreased significantly. They all kept their holdings under the 5% threshold that required public disclosure so these holdings were not publicly known. These other banks held VW’s shares as a hedge. Maple Bank in turn hedged its position by purchasing derivative contracts on VW shares through other banks. 1 Porsche had entered into option contracts with Maple Bank, the German subsidiary of the Canadian firm Maple Financial Group Inc., to lock in an acquisition price for VW’s shares.
![short squeeze definition short squeeze definition](https://i.ytimg.com/vi/yZKETKr70J4/hqdefault.jpg)
The press release proved especially problematic for investors who were short in VW’s stock. We argue that this price increase was the result of a largely unexpected press release that Porsche Automobil Holding SE (Porsche SE or Porsche) made on Sunday, Octo(the press release or the October 26, press release), when the company announced its domination plan for VW. As a result, VW briefly became the most valuable listed company in the world in terms of market capitalization. At the height of the financial crisis on Monday, October 27, 2008, Volkswagen’s (VW) stock price rose dramatically and surged past EUR 1005 per share on Tuesday, October 28, 2008, from a close the previous Friday of EUR 211 per share.