More GameStop-like short squeezes could be up ahead in the ‘fragile’ stock market, says a market research veteran

• The GameStop short-squeeze that shook markets in January probably won’t be the last of its kind, according to Wellington’s Owen Lamont.

The GameStop short-squeeze that shook markets in January probably won’t be the last of its kind, according to Wellington Management’s Owen Lamont. 

The market researcher said he anticipates more short squeezes in the future in illiquid names and “little corners of the market,” on an episode of the Exchanges at Goldman Sachs podcast published Wednesday.

“It seems to me that we’re in a market where prices are moving a lot. It’s probably not that horrible if a couple stocks every now and then go crazy. But I’m more concerned about the whole system being fragile,” he said. 

The price of GameStop’s stock surged in January after investors rapidly purchased shares of the highly-shorted video game retailer, causing short sellers to close their positions and drive the stock’s price up even higher. Lamont said this squeeze was different from ones throughout history, like Volkswagen in 2008, because GameStop’s price was driven up by “many small traders,” as opposed to a few large players. 

“The events of January just made it seem like our system is more fragile,” Lamont said on the podcast. 

He emphasized that short-squeezes are rare in well-functioning, liquid markets, and there shouldn’t be a scenario in which prices are moving so much in response to sentiment changes. 

The long-time academic researcher explained the concept of “noise trader risk,” where traders make market prices move round but rational traders who don’t want to bear the risk exit. 

“In that story, volatility begets volatility,” Lamont said. “And the crazy prices in volatility are a self-reinforcing cycle. So, I’m not sure whether it’s the illiquidity that’s causing the volatility today, or the volatility that’s causing the illiquidity. But somehow, we’re in a situation where market prices, at least in a handful of names, seem out of whack.”