“Compression shorts” refers to a questionable practice in which a trader uses a stock was sold short by buying up large blocks of shares. This causes the stock price to increase and force short sellers trying to buy stock to cover their positions and cut their losses. However, since the trader has bought up large blocks of shares in issue, short sellers may find it very difficult to buy a stock at a price that they prefer. The trader can sell the shares to the desperate short sellers at a higher price.
Squeezing the shorts can also be made with products that are traded using futures contracts. In this case, traders would take long positions in futures contracts on a particular commodity at a low price, and then try to acquire the entire stock of the same item. If the trader is successful, the one who was holding a short position in the futures contract for the purchase of goods at a higher price, only to sell it back at a lower price, which is clearly an unfavorable outcome within a short transaction of purchase and sale.
Squeezing the shorts is very difficult to achieve. For example, in the 1970’s, Nelson bunker hunt tried to squeeze the shorts in the silver market. At one point, hunt and his colleagues have produced over 200 million ounces of silver, which caused an increase in the price of silver go from 2 dollars per ounce in the early 1970-ies to almost $ 50 per ounce by 1980. Unfortunately, hunting pressure on the whole market very difficult. In this case, regulators have decided to stop the hunt manipulation by implementing higher margin requirements and limiting the number of contracts any trader can hold. In the end, the scheme the hunt failed and he was forced to declared bankruptcy.
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