Nº 21-31: Squeezing Shorts Through Social Media Platforms

At the end of January 2021, a group of stocks listed on US stock exchanges experienced sudden surges in their stock prices, which - coupled with high short interest – led to brief short squeeze episodes. We argue that these short squeezes were the result of coordinated trading by retail investors, who discussed their trading strategies on social media platforms. Contrary to popular beliefs, bot activity on social media did not play a role. However, option markets played a central role in these events. Using hand-collected data we provide the first rigorous study of these short-squeezes and show that they significantly impeded market quality not only of the stocks at issue but also of their competitors. This evidence calls for tighter monitoring of social media platforms and a better understanding of the interlinkages between these platforms, derivatives markets and equity markets.