The trader works on the New York Stock Exchange floor during the afternoon trading in New York on April 9, 2025.
Angela Weiss | AFP | Getty Images
The huge number of hedge fund short sellers rushed to close their positions during a sudden surge in stock Wednesday afternoon, turning a stunning history book gathering into one.
Traders were piled up in record numbers on US stocks ahead of Wednesday as President Donald Trump first rolled out tariffs sharper than expected tariffs on bets on stock prices.
To sell shorts, hedge funds borrow security bets from banks to sell. Then, when the price drops from where security was sold, they buy it back for a cheaper price, return it to the bank, and profit from the difference.
But sometimes it can backfire.
As stocks surged to news of a tariff suspension, hedge funds were forced to quickly buy back borrowed stocks to limit losses, a Wall Street phenomenon known as short squeezes. This artificial shopping force pushed it high, making the S&P 500 the third biggest profit since World War II.
On Wednesday it was nearly twice the shorter sized position seen in the first quarter of 2020, according to Bank of America. As funds covered, the basket of stocks that were short-circuited on Wednesday surged 12.5% on Wednesday, pulling a bigger jump than the S&P 500’s 9.5% increase, according to Goldman Sachs.
According to Factset data, 18 years ago, a whopping 30 billion shares were traded on US exchanges during the session, marking the heaviest volume on record.
“You can’t catch the movement. If you look at someone’s short cover, the exit door is very small due to these busy transactions,” said Jeff Kilberg, KKM’s finance CEO and CIO. “We live in a world where markets are increasingly convulsing. There are more and more delusions.”
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S&P 500
Of course, there were real buyers too. According to data from Bank of America, the long-only fund purchased record amounts of high-tech stocks during the session, particularly the last three hours of the day.
However, traders praise shorts running for covers due to the size of the movement.
“The pain on the short side is obvious. The whipping we witnessed over the past few weeks is extreme,” Oppenheimer’s trading desk said in a note. “What we saw with technology in that rise was clearly covered, but more realistic buyers added to the higher quality semi-finals.”
Thin fluidity also played a role in the monster’s move on Wednesday. The size of stock futures (CME E-Mini S&P 500 futures) can be traded for dropping mouse clicks to a record low of $2 million on Monday, according to Goldman Sachs data. Dramatically thin markets tend to drive massive price fluctuations.
The market returned on Thursday as investors realized the economy was still at risk from the extremely high Chinese tariffs. There is also the uncertainty that daily negotiations with other countries will bring forth the next three months.
Traders said there are still big short positions in the market.
If the market starts to gather again, it could promote things again.
“The desk view means that the short cover is finished,” Bank of America’s trading desk said in a note. “Our reasoning is that the downside and net leverage of the 20%+ SPX index has been significantly reduced in 77 weeks, as the market cannot resolve its short risk within three hours.”
“No shots were cleared within three hours,” Bank of America said.
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