Infinity Short Squeeze: What It Means, the Volkswagen Case and the Risk for Short Sellers

In a short squeeze, short sellers who are losing money buy shares to close their positions, and that buying pushes the price higher, which forces more of them to buy. Traders call it an infinity squeeze, or infinite squeeze, when the shares available to buy are fewer than the shares the shorts need: in theory, nothing caps how far the price can go before the last short is out. The term is informal: no regulator or exchange defines it.

Infinity short squeeze: definition

The U.S. Securities and Exchange Commission’s staff report on early 2021 describes the mechanism: “The potential of ‘buy-to-cover’ volume to increase share prices, thus leading to further buys to cover is often referred to as a ‘short squeeze.’” The same report notes that “short sellers could lose more than the capital they have invested.”

What turns a squeeze into an “infinity” squeeze is supply. When most of a company’s shares are held by owners who will not sell, the free float, the shares that actually trade, can shrink below the short interest. The shorts must then bid against each other for the few shares left. The price is then set by how much the remaining holders demand, not by the company’s value.

The Volkswagen squeeze of October 2008

On March 10, 2008, Porsche SE denied plans to raise its Volkswagen stake to 75%. Its statement noted that the state of Lower Saxony “holds a stake of more than 20 percent” and that the probability of acquiring the needed shares from the remaining free float was “very small indeed”. Short sellers were betting on a fall in Volkswagen’s ordinary shares; the Harvard Law School Forum summary of a later study notes that analysts expected the stock to fall to €140 or less.

On Sunday, October 26, 2008, Porsche disclosed that it held 42.6% of Volkswagen’s ordinary shares and cash-settled options on another 31.5%, 74.1% in total, and that it aimed for 75% in 2009. Porsche said there were “by far more short positions in the market than expected”. Add Lower Saxony’s stake of more than 20%, and simple arithmetic on those two disclosures leaves less than 6% of the ordinary shares in other hands for everyone else.

The options did not take shares off the market by themselves: they were cash-settled. The study’s summary explains the chain. Porsche’s counterparty, Maple Bank, hedged by buying derivative contracts on Volkswagen shares through other banks, and “these other banks held VW’s shares as a hedge”. Those shares were tied up too, so, in the authors’ words, “the free float of VW’s shares was decreased significantly”. The short sellers who needed to buy back were looking for shares in the thin sliver that was left.

The price went from a Friday close of €211 to past €1,005 on Tuesday, October 28, briefly making Volkswagen the most valuable listed company in the world, according to the same summary. Porsche’s report on the period says the move “came as a complete surprise”, and that it decided to settle up to 5% of its hedging positions to calm the market. The study’s authors estimate Porsche’s profit at at least €6 billion and the short sellers’ losses at more than €20 billion; they note a lack of effective enforcement in Germany: it came “neither by the German securities regulator BaFin nor by subsequent court proceedings”.

CNBC, citing FactSet, reports that after the October 28 peak the shares fell 58% in four days, and that a month later the stock was down 70%. Volkswagen’s squeeze was short: once the shorts were out, the buying that forced the price up was gone too.

The loop above needs no new buyer from outside: each turn is fed by the shorts themselves. It stops only when enough shares come back to the market, because holders sell into the rise, a large owner releases shares, or the shorts are all out. The word “infinity” describes the fear of the shorts, not a real price: Volkswagen’s run stopped after Porsche said it would settle up to 5% of its hedging positions to calm the market.

GameStop in 2021: a squeeze, but not mainly a short squeeze

GameStop is the other case usually cited. The SEC staff report gives its figures; the table sets them next to Volkswagen’s.

Short interest can exceed 100%, the SEC report explains, when the same shares are lent more than once. For AMC, the other meme stock of the period, it was 11.4%. The staff found that buying to cover was a small fraction of buy volume, and concluded: “it was the positive sentiment, not the buying-to-cover, that sustained the weeks-long price appreciation”.

So GameStop had the short interest of an infinity squeeze, but by the staff’s analysis buying to cover was not what drove the price: a different event from Volkswagen, where the shares themselves ran short. Other famous cases are compared in the biggest short squeezes in history.

What are the risks?

• For short sellers, a loss larger than the stake. As the arithmetic above shows, the move from €211 to €1,005 cost a short seller 3.76 times the proceeds of the sale. The SEC report notes that a sudden rise brings margin calls, which can force the buyback at the worst moment.
• For late buyers, the reversal. Both Volkswagen and GameStop gave back most of the move within days. Buying after a squeeze has made the news is buying from the people who are leaving.
• For everyone, a price with no anchor. During the squeeze the price reflects the scramble for shares, not the company. Analysts’ targets, like the €140 expected for Volkswagen, stop meaning anything.

Both cases combined a high short interest compared with the shares that could trade and a sudden event that forced the shorts to act: a disclosure for Volkswagen, a wave of buying for GameStop. Neither condition tells in advance when, or whether, a squeeze will start. Related mechanisms are explained in short covering, gamma squeeze and long squeeze; more concepts are in trading concepts.