Finance

How the mother of all ‘short squeezes’ helped drive stocks to historic gains Wednesday

Published

2 months ago

April 10, 2025

Business Finance News

A trader works on the floor of the New York Stock Exchange during afternoon trading on April 9, 2025 in New York.

Angela Weiss | Afp | Getty Images

A massive number of hedge fund short sellers rushed to close out their positions during Wednesday afternoon’s sudden surge in stocks, turning a stunning rally into one for the history books.

Traders — betting on share price declines — had piled on a record number of short bets against the U.S. stocks ahead of Wednesday as President Donald Trump initially rolled out steeper-than-expected tariffs.

In order to sell short, hedge funds borrow the security they’re betting against from a bank and sell it. Then as the security decreases in price from where they sold it, they buy it back more cheaply and return it to the bank, profiting from the difference.

But sometimes that can backfire.

As stocks soared on news of the tariff pause, hedge funds were forced to buy back their borrowed stocks rapidly in order to limit their losses, a Wall Street phenomenon known as a short squeeze. With this artificial buying force pushing it higher, the S&P 500 ended up with its third-biggest gain since World War II.

Coming into Wednesday, short positioning was almost twice as much as the size seen in the first quarter of 2020 amid the onset of the Covid pandemic, according to Bank of America. As funds ran to cover, a basket of the most shorted stocks surged by 12.5% Wednesday, according to Goldman Sachs, pulling off a larger jump than the S&P 500‘s 9.5% gain.

And a whopping 30 billion shares traded on U.S. exchanges during the session, marking the heaviest volume day on record, according to Nasdaq and FactSet data going back 18 years.

“You can’t catch a move. When you see someone short covering, the exit doors become so small because of these crowded trades,” said Jeff Kilburg, KKM Financial CEO and CIO. “We live in a world where there’s more and more twitchiness to the marketplace, there’s more and more paranoia.”

S&P 500

Of course, there were real buyers too. Long-only funds bought a record amount of tech stocks during the session, especially the last three hours of the day, according to data from Bank of America.

But traders credit the shorts running for cover for the magnitude of the move.

“The pain on the short side is palpable; the whipsaw we have witnessed the past few weeks is extreme,” Oppenheimer’s trading desk said in a note. “What we saw in tech on that rise was obviously covering but more so real buyers adding on to higher quality semis.”

Thin liquidity also played a role in Wednesday’s monster moves. The size of stock futures (CME E-Mini S&P 500 Futures) one can trade with the click of your mouse dropped to an all-time low of $2 million on Monday, according to Goldman Sachs data. Drastically thin markets tends to fuel outsized price swings.

Markets were pulling back Thursday as investors realized the economy is still in danger from super-high China tariffs and the uncertainty that daily negotiations with other countries will bring over the next three months.

There are still big short positions left in the market, traders said.

That could fuel things again, if the market starts to rally again.

“The desk view is that short covering is far from over,” Bank of America’s trading desk said in a note. “Our reasoning is that the market can’t de-risk a short in less than 3 hours which provided 20%+ SPX Index downside & major reduction in NET LEVERAGE over 7 seven weeks.”

“No shot it cleared in less than 3 hours,” Bank of America said.

Finance

Stocks making the biggest moves midday: WOOF, TSLA, CRCL, LULU

Published

20 hours ago

June 6, 2025

Business Finance News

Finance

Swiss government proposes tough new capital rules in major blow to UBS

Published

22 hours ago

June 6, 2025

Business Finance News

A sign in German that reads “part of the UBS group” in Basel on May 5, 2025.

Fabrice Coffrini | AFP | Getty Images

The Swiss government on Friday proposed strict new capital rules that would require banking giant UBS to hold an additional $26 billion in core capital, following its 2023 takeover of stricken rival Credit Suisse.

The measures would also mean that UBS will need to fully capitalize its foreign units and carry out fewer share buybacks.

“The rise in the going-concern requirement needs to be met with up to USD 26 billion of CET1 capital, to allow the AT1 bond holdings to be reduced by around USD 8 billion,” the government said in a Friday statement, referring to UBS’ holding of Additional Tier 1 (AT1) bonds.

The Swiss National Bank said it supported the measures from the government as they will “significantly strengthen” UBS’ resilience.

“As well as reducing the likelihood of a large systemically important bank such as UBS getting into financial distress, this measure also increases a bank’s room for manoeuvre to stabilise itself in a crisis through its own efforts. This makes it less likely that UBS has to be bailed out by the government in the event of a crisis,” SNB said in a Friday statement.

‘Too big to fail’

UBS has been battling the specter of tighter capital rules since acquiring the country’s second-largest bank at a cut-price following years of strategic errors, mismanagement and scandals at Credit Suisse.

The shock demise of the banking giant also brought Swiss financial regulator FINMA under fire for its perceived scarce supervision of the bank and the ultimate timing of its intervention.

Swiss regulators argue that UBS must have stronger capital requirements to safeguard the national economy and financial system, given the bank’s balance topped $1.7 trillion in 2023, roughly double the projected Swiss economic output of last year. UBS insists it is not “too big to fail” and that the additional capital requirements — set to drain its cash liquidity — will impact the bank’s competitiveness.

At the heart of the standoff are pressing concerns over UBS’ ability to buffer any prospective losses at its foreign units, where it has, until now, had the duty to back 60% of capital with capital at the parent bank.

Higher capital requirements can whittle down a bank’s balance sheet and credit supply by bolstering a lender’s funding costs and choking off their willingness to lend — as well as waning their appetite for risk. For shareholders, of note will be the potential impact on discretionary funds available for distribution, including dividends, share buybacks and bonus payments.

“While winding down Credit Suisse’s legacy businesses should free up capital and reduce costs for UBS, much of these gains could be absorbed by stricter regulatory demands,” Johann Scholtz, senior equity analyst at Morningstar, said in a note preceding the FINMA announcement.

“Such measures may place UBS’s capital requirements well above those faced by rivals in the United States, putting pressure on returns and reducing prospects for narrowing its long-term valuation gap. Even its long-standing premium rating relative to the European banking sector has recently evaporated.”