Short Squeezes and Stock Recalls

To short a stock, a trader first borrows shares (usually from a broker who sourced them from another institution's holdings) and sells them, planning to buy them back later at a lower price to return to the lender. A short squeeze happens when the price rises instead of falling: short sellers facing mounting losses start buying back shares to close their positions and cap the damage, and that buying itself pushes the price up further, forcing more shorts to cover — a self-reinforcing spiral that can send a heavily-shorted, thinly-traded stock up dramatically in a short period.

Separately, the lender of the shares — the institution that owned them and lent them out for a fee — can issue a recall: a demand that the borrowed shares be returned, usually because the lender wants to sell them itself or exercise voting rights. A recall forces the borrowing broker to either find another lender to borrow replacement shares from, or force the short seller to buy shares on the open market to close the position — regardless of whether the short seller wanted to cover at that price or believed the stock would still fall.

Squeezes and recalls can compound each other: a stock already squeezing tends to have expensive, scarce borrow, making replacement shares hard to find, so a recall in that environment often forces buying at exactly the worst possible moment for short sellers.