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Forced Closings

However, there are some cases in which the lender will force the position to be closed. This is usually done when the position is moving in the opposite direction of the short and creating heavy losses, threatening the likelihood of the shares being returned in the future. In this situation, either a request will be made to return the shares, or the brokerage firm will complete the closing of the transaction for the investor. The terms of margin account contracts allow brokerage firms the freedom to do this.

Short covering can also occur involuntarily when a stock with very high short interest is subjected to a “buy-in”. This term refers to the closing of a short position by a broker-dealer when the stock is extremely difficult to borrow and lenders are demanding it back. Often times, this occurs in stocks that are less liquid with fewer shareholders.

While the lender of a short sale transaction always has the power to force the return of the shares, this power is usually not exercised. An investor can maintain a short position for as long as they are able to pay the required interest and maintain the margin requirements, and for as long as the broker lending the shares allows for them to be borrowed.

Short Squeezes

A short squeeze involves a rush of buying activity among short sellers due to an increase in the price of a security. The increase in the security price causes short sellers to buy it back to close out their short positions and book their losses. This market activity causes a further increase in the security's price, which forces more short sellers to cover their short positions. Generally, securities with a high short interest experience a short squeeze.