What is an abusive squeeze?

According to MAR's Commission Delegated Regulation (EU) 2016/522 of 17/Dec/2015, doing an abusive squeeze is taking advantage of the significant influence of a dominant position over the supply of, or demand for, or delivery mechanisms, in order to materially distort, or likely to distort, the prices at which other parties have to deliver, take delivery or defer delivery in order to satisfy their obligations.

Basically, a squeeze is when significant constraints in supply [demand] or in other relevant market factor that affects liquidity and pricing (p.e., storage) leads to a sudden drastic buying [selling] at higher and higher [lower and lower] prices. And, an abusive squeeze is when someone causes a squeeze on purpose to profit from it.

Abusive squeezes are not that frequent, since:

• They require the manipulator to have a dominant position in the supply or demand (which usually requires applying significant amounts of money); and
• Even if the manipulator has the proper means to do an abusive squeeze, it may not be successful – he/she may end up losing considerable amounts of money.

I guess there are 3 main types of abusive squeezes:

• Squeeze the short holders of a future contract;
• Squeeze the long holders of a future contract;
• Squeeze the short sellers of a stock.

Squeeze the short holders of a future contract

• The manipulator opens a very large long position, and holds it until expiration to receive the physical commodity;
• Close to expiration, he/she suddenly cancels all sell orders;
• As the price rises, short holders incur loses… Some panic, others get their margins called... They try to buy the underlying in the cash market, but it is not available… They get desperate and start going long at any price.

Necessary conditions:

• Physical settlement at expiration;
• Cash market has limited supply (which can be aggravated by the manipulator through hoarding);

Squeeze the long holders of a future contract

• The manipulator opens a very large short position, and holds it until expiration to deliver the physical commodity;
• Close to expiration, he/she suddenly cancels all buy orders;
• As the price falls, long holders incur loses… Some panic, others get their margins called... They try to find storage space, but it is not available… They get desperate and start going short at any price.

Necessary conditions:

• Physical settlement at expiration;
• Storage space is limited (which can be aggravated by the manipulator if he owns part of it and stops renting it).

Squeeze the short sellers of a stock

• The manipulator increases his/her holdings to cause a sudden drop in free float (or acts to cause another type of drop in liquidity), and buys aggressively to cause a sudden price spike;
• As the price rises, short sellers incur loses… And faced with a sharp fall in the available shares to buy… Some panic, others get margin calls. Desperately, they start buying at any price.

Necessary conditions:

• High level of outstanding short selling positions;
• Low free float.