In all the corridors of the capital market, the words “Game Stop”, “Short”, “Short Squeeze”, “Hedge Funds” and “Day Traders” have recently resounded – and in fact, even those who do not understand what is happening in the capital market will find it difficult to avoid them.
The story, whose words are just his showcase, is a wake-up call for traders of all kinds, stock exchanges around the world, regulators, finance ministries and even the White House.
Days will tell whether the Game Stop saga will eventually turn out to be a capital market game changer or not, as in recent years the market has developed resistance, and even a kind of indifference, to such phenomena, and is in a hurry to return to its traditional routine.
So whether it’s a change in world order or a transient youth revolt, one thing’s for sure – it’s a story that brings the general public closer to the capital market. The stock exchanges, which until recently belonged solely to the knowledgeable, have now become a field that anyone can easily join, invest in and express their opinion, whether he is a veteran fox in the capital market or a beginner blogger. The capital market belongs to everyone.
So for the benefit of those who are still a little confused by the storm raging, let’s get some order here with the terms.
Short, or in Hebrew, short selling, is a strategy by which a sale of a security that is not owned by the seller is made. The short seller believes that the price of a particular security is likely to fall, so he sells it – even though he does not hold it – to purchase it later at a lower price.
The short is performed against the question. When selling paper in short, this must be done against the question paper from the security holder, otherwise, a non-existent amount of shares will be created – which in practice is not possible (unless it is in the derivatives market, but that is a different story).
The lender, that is, the entity that holds the security that the short seller is interested in, should be willing to lend its holding in exchange for the loan fee. In most cases, the lender is an institutional body that holds a large amount of securities. The loan period is agreed in advance between the parties, and it usually ranges from two weeks to a year.
The TASE clearing house operates a central database of loans in securities, using a computerized system that brings together lenders – who have a stock of securities that are free from lien and available for loan, and borrowers – who want to sell or cover short balances in securities that are not in their possession, in an efficient, simple and sophisticated manner.
A short sale entails a risk of an increase in the price of the security, and therefore any such sale requires collateral.
The Securities Exchange publishes once a week the short balances in securities, which are reported by the members of the Exchange. For each security, the short balances, their weekly change as well as the Short Interest Ratio (SIR) or short ratio to a daily average turnover are published. The SIR examines how many days it will take to cover a short in a security by the ratio of the short balance to the average daily turnover in the paper. Short-term balances can also be examined in cross-sections of indices and types of securities.
A new information product is expected to be uploaded to the TASE Data Hub system soon, which will make it possible to use additional API data on short sales on the Tel Aviv Stock Exchange.
Another statistic that is commonly looked at is the short in relation to the amount of shares held by the public (Short Interest / Shares Outstanding). In this case the ratio measures the balance of shares sold in short compared to the total balance of shares available for trading, and an interesting fact in this context is that the ratio can be greater than 1, because borrowed and sold shares can, in fact, be sold short once again.
The days of coverage and shorting in relation to the quantity in the public are the parameters that the young day traders, who invest in Game Stop, examine. The greater the parameter for covering the shorts, and the greater the ratio between the balance of the shorts and the shares in the hands of the public, the easier it is for them to squeeze the sellers short, or to perform Short Squeeze – after all, it is the sellers’ nightmare.
The short squeeze is explained as pressure from short investors, who have decided that their short investment is not materializing, so they turn the position around to cover their commitment. The wave of demand for the stock pushes for further gains, which intensify as the number of shares held by the public decreases, and as the tradability of the stock is low. Caution! When Squeeze arrives, it can be fast and violent.
In conclusion, the capital market allows for plurality of opinions, and invites anyone who has an opinion to express it. The hot debate over the events of the past week has raised the question in the media: Can this happen to us as well?
The Securities and Exchange Commission announced this week that it is monitoring social media activity. At the same time, we are seeing a growing interest in the last week in the data that the stock exchange publishes on the shortfall in sales, with visits to the Internet page increasing by 70% in the last week compared to the previous week. Short-term balances in Tel Aviv, as of last Thursday, January 28, stand at about NIS 15 billion, of which about NIS 3 billion in shares, and short-term balances are rising week by week.
Last week we reported growth in the number of retail accounts, following the opening of about 141,000 new accounts by the general public during 2020, a growth of about 44% compared to 2019. More and more Israelis want to take part in the capital market celebration, and it is important that everyone knows the mechanisms. Game Stop flooded.