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I was sceptical at first too because of the fact that they only restricted buy orders, but it makes perfect sense from the perspective of a broker in this situa

I was sceptical at first too because of the fact that they only restricted buy orders, but it makes perfect sense from the perspective of a broker in this situation. Thomas Peterffy explains it pretty well in [1], basically if you have a short squeeze and the supply is limited because of people holding their shares, the stock would basically go to infinity. Those that sold call options are out of business and the brokers have to take the counterparty risk and are themselves insolvent as a result. [1] https://youtu.be/kV_P8wnY854 https://youtu.be/kV_P8wnY854

totalZero 6y ago
> if you have a short squeeze and the supply is limited because of people holding their shares, the stock would basically go to infinity. Whoa whoa whoa. This is a slippery slope argument. If everybody is holding their shares as in your scenario, then the only way to buy shares would be to get them from a short seller. Market-makers typically have an obligation to maintain continuous and two-sided quotations, but there are exceptions to this rule in mitigating technical or legal circumstances (solvency risk seems like it would be a valid exception). If nobody is selling and everyone is buying, the price ought to go higher. That is what happens in unadulterated markets. But the price won't go to "infinity." Rather, it will go to the level at which long holders decide the payoff for selling is irresistible. They will begin to sell. A new price will be set. It is true that some hedge funds (including Melvin) would potentially have been ruined if the natural buyers had been permitted to bid for the stock. However, exchanges don't halt securities just because a hedge fund is about to go under. That is a fundamentally unfair practice. Hedge funds have failed in the past, too; not every market participant is Too Big To Fail. Their PB would be left to cover the short position, and would be responsible for whatever loss remains after the hedge fund goes broke.

totalZero 6y ago

> if you have a short squeeze and the supply is limited because of people holding their shares, the stock would basically go to infinity. Whoa whoa whoa. This is a slippery slope argument. If everybody is holding their shares as in your scenario, then the only way to buy shares would be to get them from a short seller. Market-makers typically have an obligation to maintain continuous and two-sided quotations, but there are exceptions to this rule in mitigating technical or legal circumstances (solvency risk seems like it would be a valid exception). If nobody is selling and everyone is buying, the price ought to go higher. That is what happens in unadulterated markets. But the price won't go to "infinity." Rather, it will go to the level at which long holders decide the payoff for selling is irresistible. They will begin to sell. A new price will be set. It is true that some hedge funds (including Melvin) would potentially have been ruined if the natural buyers had been permitted to bid for the stock. However, exchanges don't halt securities just because a hedge fund is about to go under. That is a fundamentally unfair practice. Hedge funds have failed in the past, too; not every market participant is Too Big To Fail. Their PB would be left to cover the short position, and would be responsible for whatever loss remains after the hedge fund goes broke.